Masaryk Universi ty Faculty of Economics and Administration
Field of study: Business Management
SERVICE QUALITY AND BUSINESS COMPETITIVENESS
Diploma work
Author: Thesis Supervisor:doc. Ing. Alena KLAPALOVÁ, Ph.D. Alexander TERESHCHENKO
Brno, 2015
Masaryk University Faculty of Economics and Administration
Department of Corporate Economy
Academic year 2013/2014
ASSIGNMENT OF DIPLOMA THESIS
For: Alexander Tereshchenko
Field: Business Management
Title: Service quality and business competitiveness
P r i n c i p l e s o f t h e s i s w r i t i n g:
Objective of the thesis: The objective of the thesis is to analyze chosen problem related to value, quality and value creation and value delivery in business-to-business market and its impact on competitiveness and to formulate suggestions for practice based on the findings of analysis.
Approach and methods used: 1. Literature search on all relevant topics (value, value creation, value delivery, quality
and value, business-to-business, competitiveness), 2. current situation and (market) analyses needed for the problem, 3. conclusions and suggestions.
Methods: All methods of value creation and value delivery analysis, market and marketing analysis and market research that are relevant to the chosen problem.
The extent of graphical works: according to the supervisor's guidelines, the assumption is about 10 charts and graphs
The thesis length without appendices: 60 – 70 pages
List of specialist literature:
• BOVET, D. and J. MARTHA. Value nets: breaking the supply chain to unlock hidden profits. 1st ed. New York: John Wiley & Sons, 2000. 270 pp. ISBN 0-471-36009-0.
• CHURCHILL, G. A. Marketing: creating value for customers. 1st ed. Burr Ridge: Irwin, 1995. 703 pp. ISBN 0-256-12539-2.
• FORD, D. Managing business relationships. 2nd ed. Chichester: John Wiley & Sons, 2003. 215 pp. ISBN 0-470-85125-2.
• GRÖNROOS, C. Service management and marketing: customer management in service competition. 3rd ed. Chichester: John Wiley & Sons, 2007. 483 pp. ISBN 978-0-470-02862-9.
• HUBBARD, D. W. How to measure anything: finding the value of "intangibles" in business. 2nd ed. Hoboken, N.J.: Wiley, 2010. 304 pp. ISBN 978-0-470-11012-6.
• PARKER, D. Service operations management: the total experience. Cheltenham, UK: Edward Elgar, 2012. xix, 557 pp. ISBN 9781781007860.
• WEBSTER, F. E. Market-driven management: how to define, develop, and deliver customer value. 1st ed. Chichester: John Wiley & Sons, 1994. 320 pp. ISBN 0-471-23693-4.
Diploma thesis supervisor: Ing. Alena Klapalová, Ph.D.
Date of diploma thesis assignment: 20/11/2013
Submission deadline for Diploma thesis and its entry in the IS MU is provided in the valid Academic Calendar.
Department Head Dean
In Brno on 20/11/2013
Abstract
The objective of the diploma thesis was set to analyze the chosen problem in relation to
value, quality and value creation, and value delivery in a business-to-business market with its
impact on competitiveness.
The author performed a literature review on all relevant topics and chose two global
enterprises to describe the current situation and (market) analyses needed for the problem. The
two chosen companies, Toyota Motor Corporation and the International Business Machines,
were reviewed from a specific perspective of value creation and value delivery, highlighting
the recent history of the companies and the current events. The author arrived at several
important observations, which were consistent with the major ideas of the reviewed literature.
These major ideas and concepts, which were derived from the literature review, are described
within the four major sections of the paper after the introduction section.
The above mentioned case studies follow the literature review sections. Further on, the
author describes a recently conducted original research for a narrowly defined scope, as he
aims to formulate the final suggestions for practice based on his findings and his understanding
of the topic. The original research was performed on one of the two companies reviewed in the
case studies section.
Keywords
Value, value creation, value delivery, quality, services, quality of services, business-to-
business, competitiveness.
Author’s Statement
I hereby declare that I worked out the Diploma work Service Quality and Business
Competitiveness myself, under the supervision of Ing. Alena Klapalova, Ph.D., and that I
stated in it all the literary resources and other specialist sources used according to legislation,
internal regulations of Masaryk University and internal management acts of Masaryk
University and the Faculty of Economics and Administration.
In Brno ___________ ____________________________________________________
signature
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Content
Abstract ................................................................................................................................. 1
Keywords............................................................................................................................... 1
Author’s Statement............................................................................................................... 2
Content .................................................................................................................................. 3
Introduction .......................................................................................................................... 6
1 The New Marketing Concept .................................................................................... 7
Innovation and Customer-Orientation ..................................................................................... 7
Market Targeting .................................................................................................................... 8
1.1 Challenges Faced with Marketing Concept.................................................................. 8
1.2 Strategic Planning ..................................................................................................... 10
1.2.1 Profit Impact of Marketing Strategy....................................................................... 11
1.3 Quality as a Sustainable Competitive Advantage ....................................................... 11
1.3.1 Defining Quality.................................................................................................... 12
1.4 “Three C’s” of Quality Strategy................................................................................. 13
1.5 A Value-Based View of Business Strategy ................................................................ 14
1.6 Fifteen Guidelines for Implementation of the New Marketing Concept...................... 14
2 Defining Every Business as a Service Business ...................................................... 20
Hidden Services .................................................................................................................... 21
Services Aimed at the Customer ........................................................................................... 21
2.1 Sustainable Competitive Advantage through the Service Perspective......................... 22
2.2 Defining Service........................................................................................................ 23
Services are processes........................................................................................................... 23
Success factors for service provision..................................................................................... 24
Value Creation...................................................................................................................... 24
Customer Satisfaction ........................................................................................................... 24
3 Definition of Quality................................................................................................ 26
3.1 Quality of Services .................................................................................................... 26
3.1.1 Quality Dimensions – Technical and Functiona ..................................................... 27
3.2 Quality as a Competitive Advantages ........................................................................ 28
3.2.1 The Perceived Service Quality............................................................................... 28
3.3 Models for Measuring Quality of Services................................................................. 29
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3.3.1 Synthesized Model of Perceived Service Quality ................................................... 29
3.3.2 The Gummesson 4Q Model of Offering Quality .................................................... 29
3.4 Quality Measurement Instruments ............................................................................. 29
3.4.1 Attribute-Based Measurement Instruments ............................................................ 30
3.4.2 Qualitative Measurement Instruments.................................................................... 31
3.4.2.1 Seven Criteria of Good Perceived Service Quality ..................................... 31
3.5 Perceived Service Quality versus Customer Satisfaction............................................ 32
3.5.1 Customer Feedback ............................................................................................... 32
3.5.2 Importance of Customer Complaints...................................................................... 33
4 Relationship Perspective ......................................................................................... 34
4.1 Relationship Strategy ................................................................................................ 35
4.1.1 Empowering Managers in the Relationship Networks ............................................ 36
4.1.2 Customer Knowledge ............................................................................................ 37
4.1.3 Customer Relationship and Loyalty ....................................................................... 37
4.2 Evaluating Relationship............................................................................................. 38
4.3 Relationship Marketing ............................................................................................. 39
4.4 Relationship Quality.................................................................................................. 40
4.4.1 Liljander–Strandvik Model of Relationship Quality............................................... 40
5 Case Studies............................................................................................................. 42
5.1 Toyota Learns to Re-Focus on Customers ................................................................. 43
Part A: The Toyota’s Quality ................................................................................................ 43
Part B: Toyota Crisis............................................................................................................. 46
5.2 IBM’s Roadmap 2015: Focus on Shareholder Value.................................................. 54
6 Research: Quality of Services Provided by a Vendor Within B2B Environment. 65
6.1 Introduction............................................................................................................... 65
6.1.1 Background of Research........................................................................................ 65
6.1.2 Problem Statement ................................................................................................ 65
6.1.3 Purpose of Study ................................................................................................... 66
6.1.4 Research Objectives .............................................................................................. 66
6.1.5 Research Questions ............................................................................................... 66
6.2 Literature Review...................................................................................................... 67
6.3 Research Methodology .............................................................................................. 68
6.4 Data Analysis ............................................................................................................ 68
6.5 Discussion................................................................................................................. 71
Conclusion........................................................................................................................... 73
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References ........................................................................................................................... 76
List of Figures ..................................................................................................................... 77
List of Tables....................................................................................................................... 78
List of Abbreviations .......................................................................................................... 78
List of Appendices............................................................................................................... 78
Appendix 1: Interview questionnaire for the employees of the selected customer account ..... 78
Appendix 2: Survey questionnaire for the employees of the selected vendor company .......... 79
Appendix 3: Results of the interview questionnaire with the customer employees................. 81
Appendix 4: Results of the survey questionnaire with the vendor employees......................... 82
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Introduction
Today it is believed that companies should aspire for excellence in the quality of the
services delivered to the client in order to achieve a competitive advantage and profitability.
The global marketplace is overcrowded and to bring about greater profitability, companies are
going beyond the 4Ps of traditional marketing practices. Strategic partnering, relationship
management, interactive marketing and the defining of every business as a service business are
no longer new ideas. Companies who have neglected to transform themselves are now a part of
history.
Historically, the focus has been on management emphasized products and production.
Marketing has been focused on market research and sales planning, as well as forecasting and
budgeting, and helping manufacturing decide how much to produce. The objective of
marketing was to produce a sale, and to maximize sales volume; the basic assumption was that
sales volume was the key to profitability. Such was the world of the 1950s as described by
Webster (1994). Customer orientation was a new idea brought about by Peter Drucker in his
famous book, The Practice of Management, published in 1954. Throughout the later years this
marketing concept, defined by Drucker mainly as the statement of management philosophy,
has evolved to become a set of principles essential for a company’s survival.
The aim of this paper is to cover the transformation of the marketing concept as it has
influenced a company’s profitability through creation and delivery of superior value to its
customers. Many of the principles discussed will be applicable to both consumer and business-
to-business markets, although the complexity of the relationship will be far greater in the latter.
It is with this focus on B2B marketing that this paper will deal with the topic of relationship
management and strategic partnering. The author’s specific focus will remain on value creation
and value delivery, and it will be the quality of a company’s offering to clients, whether it is a
product, service, or a combination of both, that the author will carefully examine.
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1 The New Marketing Concept
Profit maximization is traditionally considered to be the main goal of a firm. As the
increased profits result in an increase of shareholders’s value, this fact had often dominated
business strategies. The paradigm shift of moving from the strategies aimed at maximization
of the shareholders’ value towards the maximization of customers’ defined value had
happened after the realization that profit was the reward for creating a satisfied customer
(Webster, 1994).
Creating value for customers brought the effect of both profit maximization and an
increase of shareholders’ value. In pursuit of the customer satisfaction, customers’ satisfaction
being one of the main metric measure of the customers’ value, disciplines such as total quality
management and reengineering took a hold of the management scene. Consistent with the
global marketplace realities and its stringent requirements for competitiveness, stronger links
were developed between customer orientation and business efficiency and effectiveness. This
gave way to the emergence of new marketing and business strategies such as distinctive
competence, relationship management, interactive marketing, management of customer
loyalty, and the defining of every business as a service business (Webster, 1994).
The new marketing concept, as defined by Webster (1994), is pegged on the definition
of the purpose of a business, which is to create a customer. The new marketing concept is
aimed at making businesses customer oriented, dictating that marketing should not be a
separate business function at all. In this light, the new marketing concept is a statement of
organizational culture, an agreed-on set of shared values among the employees of a company
representing a commitment to put the customer first in all management and operations
decision making (Webster, 1994).
Innovation and Customer-Orientation
Implementing the new marketing concept follows several steps. Companies should
ensure that they are committed to innovation and customer-oriented decision-making. The
commitment is reinforced by the understanding that the profit is not an objective for the firm,
but a reward for creating value for customers. Declining profitability shows that the
company's product offering is becoming less effective, relative to substitutes and competitive
product offerings, in delivering value and satisfying customer needs. The product concept
offers that a product must rise beyond the physical product and the customer‘s expectations. A
product must be augmented with additional features and services that exceed the customer's
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expectations in important ways (Webster, 1994).
Market Targeting
The new marketing concept is connected with the market segmentation concept.
Different clients have different needs, preferences, and buying patterns that are the
fundamental foundation of market segmentation. Market segmentation provides that
customers are served as per their requirements. As a result, market segmentation brings an
important aspect of market targeting, which involves developing products and
communications aimed at specific parts of the total market to more effectively and efficiently
compete. Many variables are at play in any market, and market concept dictates that market
segmentation, product, pricing, promotion, and distribution concepts should be integrated
despite the complexity involved. Market segmentation helps a firm to identify the set of
customers the firm is committing to serve (Webster, 1994)
As customers are the determinants of the success of a company, the company has to
select the market segments that they wish to serve; no firm can satisfy all the needs of all
potential customers. This process is referred to as market targeting. Market targeting is
essential in defining distinctive competence, which is defined by the customer's perception of
value. Distinctive competence is essential in value proposition. The customer defines value by
comparing the company's product offering with those of competitors in the context of his or
her own needs, preferences, buying patterns, and use system. Thus, positioning is always done
relative to competitors (Webster, 1994).
1.1 Challenges Faced with Marketing Concept
Implementation of the new marketing concept, however, was relatively challenging for
most firms, as the firms’s focus was on product and manufacturing orientation. Firms which
emphasized sales volume and had a weak integration among marketing functions and of
marketing with other functions. On the other hand, firms are required to ensure true customer
orientation, managing for profitability and integrated marketing at the business unit level.
These requirements tend to cause difficulty in accepting change (Webster, 1994).
.In addition, analyzing the customers’ needs posed difficulty in implementing the
marketing concept. The analysis of the customers’ needs ensures a company the ability to
define itself not by its products but by the basic customer needs it was committed to
satisfying. Failure of appropriate analysis would result in a disconnect between the customer’s
needs and the company’s focus, creating room for competition to step in. Although market
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concept requires focus to be on the customers’ needs, an inward perspective would be required
(Webster, 1994). The firm has to establish what it can do well since it is just as important to
understand the firms’ capabilities as it is to understand customer needs.
Companies often have many goals that are either conflicting or competing for the
same resources. For instance, the management might easily state that the firm is committed to
customer orientation, but it is harder to make the resource commitments. Mostly, the
shareholders’ interests such as dividend payments dominate the management agendas. This
dominance causes firms to prioritize other things before the customers. Poor prioritizing
results lead to ineffective allocation of resources. Marketing initiatives are highly
underfunded. Marketing concept offers customers value; however, the initiative requires
specific resource commitments. These resources commitments do not offer returns in the short
run, which is conflicting with many short-term goals of any firm. Another factor that results in
difficulty in prioritizing the customer concept is that the experience of many firms is that
marketing has regularly promised more than it could deliver (Webster, 1994).
In most instances, marketing was treated as a different business function mainly
because of the conflict between the sales and marketing viewpoints. Marketing was highly
linked with research and development while sales was highly associated with the promotion,
distribution, and pricing. These conflicts are referred to as marketing bureaucracy because
they caused inefficiencies. Many firms had established marketing departments. While this was
good, marketing is also required to be incorporated or integrated into every business process
(Webster, 1994).
Marketing, when handled as a separate management function, created conflicts with
other management functions. Research on the customer need is done in the marketing. Also,
marketing should be directing the firms in product development, manufacturing, and
distribution activities, and indeed all other support functions from credit to human resources to
purchasing to financial management, toward the delivering of maximum value for customers.
Marketing is charged with being expert on the customer, for keeping the rest of the
organization both informed about and focused on the customer. Marketing is an advocate for
the customer's point of view. However, managers in other functions often have other
constituencies that must be served and satisfied, although they may honestly believe that they
are putting the customer's interests first when they look at things from their own internal
company perspectives (Webster, 1994). This need to serve all parties caused a conflict
between marketing and other managerial functions. A final and most important challenge in
implementation of the marketing concept is that there was no sufficient evidence to support
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the hypothesis that marketing concepts can improve the organizational performance.
1.2 Strategic Planning
While the approach of customer orientation articulated by Peter Drucker and the focus
on the customer as the end objective was widely accepted by many, including visionaries such
as IBM’s chairman Thomas Watson, Jr., it was these challenges described above that gave
birth to a new management concept of strategic planning and popularized its implementation
and usage.
Strategic planning had mainly focused on a long term planning of the business and
incorporated the what, the how and the when aspects of business decisions. It, however,
continued to aim at profit and shareholders’ value as the primary objective of a business.
The overal strategic planning as defined by Ansoff in his Corporate Strategy
published in 1965 seems to have failed to recognize the purpose of the business, outlined by
Drucker (1954), as “to create a customer“. Involvement of marketing remained minimal.
Product-market selection was considered to be a strategic decision and distribution was an
administrative decision, so then the balance of what he would call marketing was pricing and
promotion decisions were the operating decisions. Thus strategic planning offered a long-term
objective, which was fulfilled through a series of short-term activities. A balance between the
long-term and short-term picture of the business was required, or else the firm lost sight of the
objective of customer value (Webster, 1994).
Strategic planning was aimed towards matching the strengths and weaknesses of the
firm with the evolving set of competitive threats and market opportunities. This argument was
based on the focus of the firm’s internal technological capabilities — the things it could do
best (Webster, 1994). This basis of strategic planning indicates that the source of a firm’s
competitive advantage is derived from the firm's strengths and weaknesses and the need to
develop specific competencies. According to Ansoff, markets were defined as sets of
competitors rather than as sets of customers under which the success of a firm was based on
its ability to compete through its internal structure. Competitive strength was measured in
terms not of satisfying customer needs but of achieving a dominant position - market share -
based on lowest total cost. Basic concepts of customer value were simply not part of the
strategic planning conversation (Webster, 1994).
The strategic planning approach emphasized the return on investment, cash flow,
market dominance, low cost, and markets defined as sets of competitors. The new marketing
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concept, as defined by Webster, was focused on customer orientation, innovation, and long-
term profit as a reward for creating a satisfied customer.
1.2.1 Profit Impact of Marketing Strategy
The dominance of analytical planning within the framework of the strategic planning
gave origin to the Profit Impact of Market Strategy (PIMS) analysis, a project started by the
General Electric Company in 1969, which later split off into a separate organization called the
Strategic Planning Institute, containing a database of over 450 companies. By using regression
analysis, the PIMS analysis used various variables in determining their impact on profitability
(Webster, 1994).
Market share was one of several key variables that was analyzed as it was believed to
have a direct correlation and influence on profitability. The relationship between market share
and profitability was proven to be complicated, since market share did not influence
profitability directly. Studies indicated that both market share and return on investment tended
to be jointly determined by other factors, one of them being quality. This finding elevated the
importance of quality and gave birth to an era focusing on quality management (Webster,
1994).
Customers are naturally willing to pay a higher price for high quality products or
services. This observation allowed to firms differentiate their offerings, as confirmed by
Michael Porter in his book Competitive Strategy, published in 1980. An approach to induce
profitability from quality was labeled a "margin strategy," and is contrasted with the "high-
volume/low-cost strategy" or market dominance strategy. Through margin strategy, a
company pursues well-defined market niches, a set of customers with needs and wants who
are served by the unique features and superior quality of a differentiated product or a service
(Webster, 1994).
1.3 Quality as a Sustainable Competitive Advantage
Based on Michael Porter’s proposition, a firm can choose either of two strategies – a
volume strategy or a margin strategy – but not both. Those companies attempting to do both
end up with the lowest return on investment. Webster (1994) argues that the margin strategy is
the only sustainable competitive advantage strategy. He calls it a quality strategy, tieing
together market share, volume, low cost and profitability. Here, superior quality leads to both
high market share and volume, leading to low cost which is in parallel with high margin
through the high price that a firm is able to charge for the quality built into its product or
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service.
The main assumption and pre-requsitive of the strategy is the customer’s value of
superior quality.
Additionally, both Webster (1994) and Grönroos (2007) highlight that a firm must
combine customer-centered analysis with a competitor-centered analysis to match the
company's distinctive competence with a set of market needs and wants that is less than
completely served by competitors. The new marketing concept began to reemerge as the
companies began to balance the strategies between the “Three Cs“ -- Customers, Company
and Competititors (Webster, 1994).
1.3.1 Defining Quality
As mentioned, one of the most important single factors affecting a business unit's
performance was found to be the quality of its products and services. It is important to specify
that quality was measured as relative to that of its competitors, and it’s one of the main
purposes of this paper to clearly define and specify the concept related to quality definition,
measurement and delivery.
The most successful quality programs define quality not in terms of products, but in
terms of a total way of doing business, a total commitment to the customer. The company or
the manufacturer must view themselves as partners with their customers. The partnership is
based on a thorough understanding of the customer's processes and how they interact with the
seller's processes, and careful management of their integration (Webster, 1994). The effort is
focused on making the business partners more competitive in their markets and goes well
beyond simply offering good products.
Quality became a key determinant of company’s success. By definition, quality is
solely defined by the perception customers have about the solutions provided, although there
are other factors influencing the quality. Thus, quality is the ultimate measure of the value
derived from the customer’s interaction with the firms or suppliers. This aspect of business
has prompted companies to redefining themselves as services providers despite their core line
of business.
Through this redefinition, new main objectives and business strategies have come up.
Businesses have shifted their objectives from profit maximization and creation of
shareholders’ value to the creation of customer value. This objective has caused many debates
and discussions because the goal is seen as too broad to define all the variables involved.
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However, in the past few decades customer value objectives have enabled many businesses to
remain afloat and gain substantial competitive advantage (Webster, 1994). Since customers
are mainly defined as the market, businesses have adopted new ways of doing business. These
strategies are mainly encompassed in total quality management and the marketing concept.
Total quality management (TQM) is a well thought out approach to provide customers with
products and services that satisfy their needs. TQM is measured by various models, one of
them being SERVQUAL. The SERVQUAL model defines quality in terms of the comparison
of expected and perceived benefits and the identification of "gaps" in the service delivery
process.
1.4 “Three C’s” of Quality Strategy
Total quality management and value delivery concept are highly related as they have
similar characteristics. It is important to note that not all views of quality put the customer
first. In the Case Studies section of this paper we will have a detailed review of Toyota’s
implementation of TQM and the price the company paid for focusing on internally defined
quality metrics more than it focused on their customers’ feedback.
Many companies are internally focused and use product-oriented and technical
definitions of quality. Other internal definitions of quality may focus on the people of the
organization, processes for managing those people, their obligations to one another and their
teams in the pursuit of organizational excellence (Webster, 1994). However, the true
definition of quality is meeting and exceeding customer expectations. There are three forces
that drive customer expectations: the customer's dynamic needs and wants, the company's
promise and delivery of superior performance and competitors' promises that they can do even
better. The “Three C’s” — Customers, Company, and Competitors — become the “Three
C’s” of quality.
Quality goes beyond customer expectations. The company must work with customers
and look at its own capabilities to apply them in new areas, not just doing what the customer
says, but continuously innovating and looking to the future. To keep customers satisfied,
companies have to continuously improve in order to offer new and better solutions to
customer problems (Webster, 1994).
For effective implementation of the value-based view of the business strategy,
companies should critically analyze the market in terms of the “Three C’s” of marketing
concept. To begin, the company has to analyze the customer needs and wants; that is, the
company has to be customer oriented (Webster, 1994). Being customer-oriented is more than
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a mindset; it is, more specifically, having current, correct, and complete information about
customers, carefully analyzed with regard to their value perceptions and their assessments of
competitors' product offerings.
1.5 A Value-Based View of Business Strategy
A firm’s value proposition must be based on skills and resources that deliver value as
perceived by the customer. All of its employees must understand how customers define value,
based on their needs, wants, and product use systems, and how they evaluate the firm's
offering relative to those of competitors (Webster, 1994).
A distinction between the exchange and relationship perspectives arises. Customers’
value under exchange perspective is created during the production process. Under relationship
perspective, customers’ value is created throughout the relationship by the customer, partly in
interactions between the customer and the supplier or service provider. Thus according to a
relationship perspective, the focus of marketing is value creation or value formation, rather
than value distribution (Grönroos, 2007).
Quality is dependent on the entire process. Companies with a mature commitment to
total quality management have a quality process that extends back into vendors' processes.
The process of creating value is referred to as the value chain, and marketing, as a process of
defining, developing, and delivering value, is built around the concept of the value chain
(Webster, 1994).
1.6 Fifteen Guidelines for Implementation of the New Marketing
Concept
The running of businesses has changed drastically over the past century. This change
has brought about a new emphasis on the customers. The emphasis is brought by the fact that
the supply side of the market outweighs the demand side of the market. In this regard,
businesses have understood that in the current economic world, customers are the single
determinants of the success of the business (Webster, 1994). The need to understand and
satisfy the customers has led to the shift in the main objective of any firm. The new definition
of a firm’s goal relates to the creation of value for customers.
In order to implement the new goal, companies are required to adopt appropriate
strategies while simultaneously analyzing the factors affecting those strategies. The main
factors affecting the realization of the goal is condensed into an acronym referred to as the
“Three C’s“. The C’s stands for the customer, competitors and the company itself (Webster,
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1994). The reasoning behind the “Three C’s“ is that the company has to analyze the
customers’ requirements, the competitors’ way of doing business and the internal affairs and
processes of the company. The analysis offers the company and its decision-makers an avenue
to determine the basic strategies that would help it achieve its objective (Webster, 1994).
The most appropriate strategy that would help meet the customer value creation
objective is based on marketing. The market is the platform that allows the interaction
between the company and the customer. Thus, the strategy adopted by companies is known as
the marketing concept. The marketing concept dictates that a company should aim at
maximizing the customer satisfaction. Satisfaction is the main measure of the value the
customers derive from the solutions offered by the suppliers (Webster, 1994). In this light,
companies should provide quality solutions, since customer satisfaction is dependent on the
quality of services offered. By definition, quality refers to the customers’ perception of the
services offered by the suppliers.
A company should understand several key aspects of doing business in the new and
ever-changing business environment in order to effectively implement the new marketing
concept. First, companies should strive at putting the customers first, always (Webster, 1994).
Customers are the reason for the existence of businesses; businesses are mainly established to
serve the customer. Secondly, firms should shift their focus from profits to service delivery to
the customer. The new business environment leads to a change in definition of profit; profit is
a reward of creation of value for customers (Webster, 1994). In addition, it is essential for the
companies or businesses to understand that the new marketing concept depends on the total
quality management. Quality management is influenced by all of the factors that fall under the
“Three C’s” analogy.
The implementation of the new marketing concept depends greatly on interrelated
ideas that are called the essential set guidelines for implementation. The first guideline is to
create customer focus throughout the business. Throughout history, marketing focuses on
customer orientation. Marketing concepts dictates that the entire organization led by
management should aim at creating a satisfied customer (Webster, 1994). Customer
orientation is an important aspect of marketing in that it stresses on the commitment to quality
and a value-driven concept of strategy. In this light, for companies to be customer oriented,
they should aim at improving efficiency and lower costs in order to deliver superior value to
customers. Costs come into play since cost influences price; price is always part of the
customer's value calculation.
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Secondly, the firm should appreciate the art of listening to customers. Listening to
individual customers allows the companies to understand their perceptions, expectations,
needs, and wants. For this reason, a company should always seek opportunities that will
enable it to listen to customers (Webster, 1994). Listening should not be restricted to customer
feedback only. An important aspect of listening to customers relates to customer complaints.
Complaints offer important information that assists the company in determing how customers
define value and the areas in which the company fails to deliver value. Also, customer
complaints give an insight into some aspects the company didn’t know about its competitors.
Companies should always be prepared to hear what the customers say, and use the
information acquired to make informed decisions (Webster, 1994).
Thirdly, the company should clearly define and nurture its distinctive competencies.
Distinctive competencies refer to the skills, resources and knowledge that enable a company
to deliver value to customers and do it better than its competitors. Distinctive competencies
have no strategic value if customers do not perceive them as having value. A well nurtured
and developed distinctive competence is a source of sustainable competitive advantage if
properly deployed. Value is mainly defined by customer perception, but distinctive
competencies also define value when brought to the market place (Webster, 1994).
In addition, marketing should be defined as market intelligence. Market intelligence
relates to the customer knowledge, which is one of the most important assets of any company.
Marketing provides a function that makes a firm an expert on the customer. The function acts
as an advocate on behalf of customers by providing necessary information that makes the firm
be customer focused and market driven (Webster, 1994). The management has to establish
what market information is of strategic importance, since this information helps in future
planning as well as in adapting to the customer's ever-changing definition of value.
Targeting customers precisely is the fifth guideline of implementing the new
marketing concept. The strategies under this guideline are market segmentation, targeting, and
positioning. Positioning relates to the added meaning of value proposition. Targeting the
customers to be served by the firm involves strategic decision-making to match up customer
characteristics and company capabilities. Market segmentation is an analytical exercise which
depends on solid information about customers and about competitors' product offerings. These
three strategies are essential in developing relationship with customers (Webster, 1994).
Relationships help in retaining customers, since sometimes it is more valuable for a firm to
retain customers than to seek new customers. Retained customers are likely to be more
satisfied with the company and are loyal as well.
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Profitability aspect arises when implementing the marketing concept. Companies
should manage for profitability and not for sales volume. Profit is a measure of the value that
the firm has created for the customer; that is, profit shows the efficiency of a firm to deliver
value and the firm’s ability to understand customer value. By definition, profit is the ratio of
customer benefits to the costs of the product offering. This means that profit is a metric
measure of the difference between the value produced in the marketplace and the costs of
acquiring the resources used to create and deliver that value (Webster, 1994). Customer
orientation, innovation, quality and market targeting are the essential forces that result in both
sales volume and above-average pricing, resulting in superior profit margins and better return
on investment. Thus, companies should concentrate on creating value for customers rather
than focusing on profit maximization through increasing sales volume; profit is a reward for
creating value for customers.
The seventh guidline is that customer value should be the guiding star in any business
undertaking. Customer value is the basis through which a business unit strategy is developed.
The platform on which a company should compete is built around this concept of customer
value. This indicates that the fundamental culture of any organization and the shared values,
as well as the beliefs, is based on delivery of superior value to customers (Webster, 1994). In
this regard, the mission statement of the company should entail the definition of customer
value and the accompanying aspects of customer value.
Additionally, quality should be defined on the basis of customer perception. The
eighth guideline indicates that companies should let the customer define quality. Traditionally,
quality was defined as avoiding mistakes, preventing things that could go wrong and reducing
them to acceptable levels (Webster, 1994). However, quality relates to specific product
performance characteristics that lead to customer satisfaction. Thus, the management activities
towards quality are analyzing customer needs, developing a description of the product
offering that will meet those needs, turning that description into a technical specification,
creating the product offering, communicating the value proposition back to customers, and
measuring the extent to which the company has met customer expectations. The model of
service quality has general applicability, especially when every business is defined as a
service business (Webster, 1994). Customer expectations evolve continuously; thus, quality is
a dynamic concept coupled with a commitment to continuous improvement and innovation.
Also, the customer expectations should be measured and managed as indicated by the
ninth guideline. Measuring customer expectations helps in setting the performance standards
that are essential in quality management program. Additionally, measurement is a driving
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force behind the establishment of continuous improvement and innovation activities (Webster,
1994). Measurement goes beyond routine measures of customer satisfaction to capture the
entire service bundle. Management of the expectation is seen in the manner through which
companies plan and develop marketing communication. As stated earlier, managing customer
expectations begins with market targeting. Different market segments have different
expectations and respond to marketing communications differently. Additionally, marketing
communication should be formulated in a manner that it would show the firms capability to
meet the expectations but remain within the parameters of the firm’s capabilities.
Overpromising would be bad for business (Webster, 1994).
In addition, businesses should concentrate on building relationships and loyalty with
customers. The new marketing concept views customers as the most important asset and thus
marketing is geared towards attracting customers rather than making a sale. Customer
relationships must be developed over time; it is more important to maintain existing clients
than to obtain new clients. Existing customers always offer the potential for greater
profitability than new customers (Webster, 1994). Existing clients offer an opportunity to sell
additional products and services and they generate favorable word-of-mouth. It costs more, in
terms of communications and related marketing efforts such as developing specific product
offerings, to attract new customers.
The other requirement revolves around defining a business as a service business.
Customer expectations are focused on the service bundles attached to the end product or
service. Customers buy value in the form of benefits provided by the product offering and as
such the service aspects of the product offering are determinants of dissatisfaction. Thus,
every line of business is defined as a service, prompting the definition of a business as a
service business (Webster, 1994). The service bundle acts as the differentiating part of the
product, meaning that the service bundle is the main indicator of competitive advantage.
Competition in the new marketing concept is related to the service bundles comprised by the
offerings of any company.
Continuous improvement and innovation are additional guidelines which any company
implementing the new marketing concept should be committed to. Customer expectations are
ever changing, and companies should always cope with these dynamics. Continuous
improvements are essential to lowering costs that in turn are reflected in the lower prices
offered to customers (Webster, 1994). Lower prices underscore the value of the long-term
relationship with those customers. To maximize the value of customer relationships and to
build customer loyalty, the company must be able to create new products and services that
19
will enhance the value of the relationship for both the company and its customers (Webster,
1994).
The thirteenth guideline requires management of culture along with strategy and
culture. Organizational culture is extremely important and a major determinant of profitability.
Managing culture has two implications. First, customer orientation must be inculcated
throughout the organization. Attention must be devoted to the details of language and other
symbols that capture and communicate the vision of customer orientation. Second, a broader
concept of organizational culture must be developed that focuses the firm outward on its
customers and competitors and that creates an overwhelming predisposition to entrepreneurial
and innovative responsiveness in a changing market (Webster, 1994).
In addition, companies should always foster growth with partners and alliances. As the
firm develops its strategic vision and its definition of the sources of competitive advantage in
its distinctive competencies, it also identifies the need for partnerships with customers,
suppliers, distributors, and competitors, present and potential. With the focus on customer-
defined value and the firm's distinctive competence, marketing management plays a critical
role in defining those areas where the firm will develop its own competencies and where it
must find strategic partners (Webster, 1994). This is because marketing people will often
work with teams from other parts of the organization to address issues relating to total quality
management and continuous improvement on behalf of the customer.
The final guideline demands that marketing bureaucracies should be destroyed.
Traditionally, marketing responsibilities were restricted to the marketing department.
However, the new marketing concept requires that the customer must be everyone's shared
responsibility (Webster, 1994).
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2 Defining Every Business as a Service Business
Despite the main business line of the organization, services are crucial for any and
every business organization. The basic businesses are categorized broadly into service or
physical products; however, organizations cannot depend solely on the core business without
other affiliated services. For this reason, services are crucial in value creation as they support
the daily operations of the business (Grönroos, 2007).
The service sector, being one of three economic sectors as per commonly accepted economic
definitions, is now the largest sector of the economy in terms of nominal GDP and percent of
the workforce in most of the Western world countries. It also continues to be the fastest-
growing sector. The following figure shows the 5 top countries (France, United States,
Greece, United Kingdom and Belgium) whose service sector proportion of 2014 nominal
GDP starting to reach 80% of the total economy, while the rest of not that far behind at 63.6%
as average proportion.
Figure 1: Nominal GDP sector composition, 2014 (in percentage and in millions of dollars)1
Over the last 100 years, the sector has replaced the agricultural and industrialization
sectors to become the top tier sector in the world, including a great number of industries such
as entertainment, telecommunication, healthcare, information technology, financial services,
consulting, real estate, education, and many others. What’s important to acknowledge is that
besides the businesses that clearly fall within these industries, any other firm in agricultural or
industrial sectors is also heavily relying on the concept of services, some of them being
internal (or so-called hidden) and others being customer-facing. As an exmple, Grönroos
1 Source: GDP Sector composition: Field Listing - GDP composition by sector. - CIA World Factbook
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(2007) clearly identified five different stages in the manufacturing industry where the service
component is always incorporated:
Before manufacturing (e.g. research and development, design, financing).
During manufacturing (e.g. financing, quality control, safety, maintenance).
Selling (e.g. logistics, distribution networks, information).
During the consumption and usage (e.g. maintenance, leasing, information,
customer training, software upgrading, complaints handling, invoicing).
After consumption and usage (e.g. waste management, recycling) (Grönroos, 2007).
The service components listed above as examples may be managed by the business
itself or outsourced through a value chain in a complex business-to-business relationship.
The magnitude of the impact of service-related aspects such as quality of services
should not be limited by looking at companies within the narrowly defined scope of service
sector, especically given the understanding that the services play a pivotal role in the
development of competitiveness of the firm as well as in creation of value for the firm’s
customers and shareholders. We are to look at every firm and consider the service elements of
its operations.
Hidden Services
A firm may consider a service to be hidden when it cannot be differentiated from the
cost of conducting the company’s core function. Firms may not consider such services to be
delivered directly to customers, but rather to be of an administrative nature. An example of
such could be billing or complaint handling activities (Grönroos, 2007). If these services,
however, are implemented and managed without the customer focus, they will inevitably lead
to inefficiencies and customer dissatisfection. The effectiveness of such non-billable services
is concealed by the fact that these services are not viewed as such by the decision makers.
Like the billable services, such hidden services are essential to the creation and sustainability
of a competitive advantage.
Services Aimed at the Customer
Customers don't buy products; they buy a set of benefits and solutions to problems.
This changes how companies view their clients activities; that is, view the customers in terms
of what they are buying as opposed to what the company is making and selling. Different
customers expect and derive different benefits from the same product (Webster, 1994). This
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difference results in customers identifying with distinct market segments with different
strategic requirements. Such insights are not possible if the business is defined in terms of its
products or services that it offers. Instead, emphasis should be given to solutions that will
create value for the customers. In this regard, it can be said that customers look for solutions
that serve their value-generating processes (Grönroos, 2007).
2.1 Sustainable Competitive Advantage through the Service
Perspective
It is difficult to build a competitive advantage based on a company's core product
unless the firm has a sustainable technological advantage or continuously lower costs.
However, price is not sustainable advantage. As a result, a services perspective is very crucial
and should be more highly valued than the other perspectives, which include:
a core product perspective
a price perspective
an image perspective (Grönroos, 2007).
Customer relationship goes beyond transaction of the core products of the business;
the core product is less often the reason for dissatisfaction than the elements surrounding the
core. Hence, competition has shifted from the core business to total service offering. This
competition is referred to as service competition, provoking a need to understand the nature of
service management. As a consequence, internal collaboration among departments is required,
resulting in the whole chain of activities being coordinated and managed as a total process.
Failure to do this coordination results in the creation of sub-values but not total value that in
turn fails to capture the relationship perspective (Grönroos, 2007). A process management
approach should be taken to the whole operation of the firm. In such an approach, traditional
departmental boundaries are torn down, and the workflow is organized and managed as a
value-supporting process that enables and strengthens relationship-building and management.
The overall strategic position of the business is more highly dependent on the service
perspective than the others. The service perspective explains the role of service components in
customer satisfaction. The satisfaction is achieved through customer relationship with the
organization and in return the organizations enjoy a sustainable competitive advantage. The
efforts to use services to achieve consumer satisfaction can be improved through appropriate
service management.
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2.2 Defining Service
A service is a process consisting of a series of more or less intangible activities that
normally, but not necessarily always, takes place in interactions between the customer and
service employees and/or physical resources or goods and/or systems of the service provider,
which are provided as solutions to customer problems (Grönroos, 2007). For instance,
successful marketing models require the inclusion of the interactions between the service
provider and the customer during the consumption process as an integrated part of marketing.
Service management and marketing depend on the inclusion and participation of the
customer in the service process. Services feature are mainly specific to the type of the service,
but in general services have three basic characteristics:
1. Services are processes consisting of activities or a series of activities.
2. Services are at least to some extent produced and consumed simultaneously.
3. The customer participates as a co-producer in the service production process at
least to some extent (Grönroos, 2007).
Services are processes
The most important feature of services is their process nature, especially where the
customers’ participation is part of the process. Service is a process of a series of activities that
are produced and consumed simultaneously (Grönroos, 2007).
Unlike goods that are value-supporting resources, services are value-supporting
processes, i.e. processes that support customers' value generation. This analogy leads to the
definition of service logic, where service logic means to facilitate processes that support
customers' value creation in their daily activities and processes (Grönroos, 2007).
Services are categorized using different grouping forms. Based on the nature of the
relationship with customers, services can be divided into (1) continuously rendered services,
and (2) discrete transactions. As a result, firms offering services on a continuous basis should
mainly use a relationship oriented approach towards customers as they cannot afford to lose
customers (Grönroos, 2007). Thus, the form of their customers’ service consumption must be
understood by the business.
The consumption of the service process is a critical part of the service experience and
as such service consumption is a process consumption. Service production and consumption
are continuous processes with interactions between the consumer and the service provider's
production resources (Grönroos, 2007). Firms are often required to readjust their resources to
24
match the customer‘s needs, with the firm’s resources being, for example, personal,
technology, knowledge or even the customer’s time.
Although all resources are important in the service process, the value that the firm
offers is not embedded exclusively in any of the specific resources used during the service
process, but rather it emerges in customer’s consumption of the service process.
Success factors for service provision
The The success of services is dependent on the employees (individual intellectual
capital) of the firms. In effect, the firms have to employ knowledgeable, skillful, motivated
people committed to good service. In addition, other intellectual capital plays an important
role in the development of services (Grönroos, 2007). The employees should be managed well
to allow the success of firms, as employees are crucial in the service provision.
Market-oriented management is needed when the competitive advantage of a firm is
built upon customer relationships. This is due to the fact that no separate function can
successfully guarantee that customers will be satisfied with the quality and value they receive
and will be interested in continuing and deepening the relationship (Grönroos, 2007). As a
result, decision makers should yearn at attaining a service advantage in a customer-focused
manner.
Value Creation
Services are very crucial in the creation of value in all business. Traditionally, the
services didn’t carry a lot of weight in decision-making platforms. However, this perspective
has changed with a lot of emphasis being placed on the contribution services bring to the
economics and the businesses at large. Services play a pivotal role in achieving the firm’s goal
of shareholders’ wealth maximization. (Grönroos, 2007). However, to achieve this important
goal, the going concern aspect of the business has to match with customers’ satisfaction. In
this regard, services play a crucial role in establishing a proper client base as well as ensuring
that the clients acquired are satisfied and happy.
Customer Satisfaction
Services are essential in any production process. It is established that the services are
essential to ensuring that all the parties in a market structure are contented (Grönroos, 2007).
That is to say, services ensure that all the expectations of the various market parties are met. In
this light, businesses have to develop service management and marketing models that are
geared towards meeting the customers’ satisfaction. Thus, the decision-makers have to
understand what the customers are seeking and what they evaluate as a measure of their
25
satisfaction (Grönroos, 2007).
Understanding how the customers perceive and evaluate the services will make it
possible to identify ways of managing the service evaluation and influence them in a desired
direction. Services processes are very complex; thus their evaluation becomes complex too
(Grönroos, 2007). Customers mainly evaluate the services using the quality metrics, leading
to an evaluation approach known as perceived service quality.
The customers’ perception of quality of the services acts as the basic foundation of the
measurement of their satisfaction. The customers’ satisfaction measurement models are
additionally based on the disconfirmation construct and fits services well. The features of
services make it difficult to measure quality on the basis of the goods-related quality know-
how; although this is often used in services’ quality evaluation (Grönroos, 2007). The
requirements of the services satisfaction results in a very important question in the perceived
service quality model: What is the quality? Quality is whatever the customers perceive it to
be.
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3 Definition of Quality
The customer’s definition of quality is influenced by many factors, the main one being
brand name and image (Webster, 1994).
The brand name, in creating a set of expectations for product performance, becomes
part of the definition of quality by the customer. A strong brand creates high expectations.
Consumers develop amazingly strong imagery around a brand name. All the factors relating to
the customers, competitors and the company itself are essential in developing the product
offering.
The product offering flows from the value proposition (Webster, 1994). The value
proposition establishes the firm's strategic direction. It is based on the selection of markets and
customers to be served and a commitment to develop and maintain the distinctive
competencies necessary to deliver superior value to those customers.
The market interaction involves the customer and the solution. A customer is someone
or some organization willing and able to pay for the benefits delivered by the potential
product. The potential product is more likely defined by the opportunity to add additional
services rather than the physical product features. The solution goes beyond the product itself;
it includes all aspects of the customer's interaction with the company (Webster, 1994). The
company aspects are crucial in the interaction with the customer. Aspects like information
technology are very essential. IT enhances personal relationships despite the popular belief
that it destroys them.
In conclusion, the company that is easiest to do business with is likely to get the
opportunity. Service as part of the product offering is where the competitive battles of the
future will be won and lost. Service is likely to be the key to successful positioning and a
complete value proposition. Therefore, the companies are required to combine the product
features with various services to derive the appropriate solution to customers (Webster, 1994).
3.1 Quality of Services
Quality of services is what the customers perceive it to be. The scope of quality needs
to be properly defined. Quality is a broad concept as satisfaction of services is based on
experience. The definition of the quality scope has to capture or match the customers’
definitions and experiences. Otherwise, decision-makers are likely to take wrong actions,
resulting in poor investment of resources (Grönroos, 2007). The service consumption and
experiences are highly subjective, as satisfaction is individually specific. However, on a
27
broader platform quality of a service has two dimensions: a technical or outcome dimension
and a functional or process-related dimension.
It is important to note that the quality of services is thus a perceived quality. The main
reason behind this argument is that customers evaluate service on what they are left with after
their interaction with the service providers. For instance, when a customer enters a business
premises, their interaction with the personnel and the environment determines their
satisfaction. In this example, satisfaction is based on the interaction and not the end product.
As a result, the functional or process-related dimension carries more weight in quality
measurement than the technical or outcome dimension.
3.1.1 Quality Dimensions – Technical and Functiona
There are two dimensions: the technical or outcome dimension and the functional or
process-related dimension. The technical dimension indicates what the customer receives at
the end of the interaction with a firm. This dimension is important in measuring outcome
quality, which results from the service production process and its buyer–seller interactions
(Grönroos, 2007). The technical dimension measures the quality of the result. This dimension
can objectively be measured by customers due to its characteristic as a technical solution to a
problem. Thus, the technical dimension relates to what the customer receives.
The functional or process related dimension carries much weight in establishing the
quality of a service. The technical dimension rarely counts in the measurement of the total
quality of a service process. Customers measure total quality through the experience that
results in technical quality. Thus, the technical dimension relates to what the customer
receives, while the functional dimension relates to how the customer receives it (Grönroos,
2007).
These two basic dimensions are highly dependent on the image of the firm. A good
image makes a company favorable to customers, and small errors are likely to be ignored;
hence, as far as the quality perception is concerned, image can be viewed as a filter.
There are some extensional dimensions that are essential to the quality of a service.
The main additional dimension relates to the environment and thus explains where the service
was acquired. This dimension is referred to as the Servicescape dimension and ranks as the
third basic dimension. The Servicescape consists of the physical resources, technology and
other physical elements surrounding the service process. It helps to create the ambiance of the
service process. Thus, it is expected to have an impact on the way service employees and
customers behave and interact in service encounters (Grönroos, 2007). However, this
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dimension can also be viewed as part of the how or process-related dimension.
3.2 Quality as a Competitive Advantages
Quality is currently the basis of ensuring competitive advantage. The management has
to establish what dimension is essential for improving the competitive advantage of the firm.
Technical quality is usually viewed as the ultimate measure of quality, but the technical
dimension fails to capture the total quality; that means that the dimension contribution to
competitive advantage is negligible. The reason for this is that many firms can easily produce
products of similar technical quality and solutions quickly (Grönroos, 2007). Good technical
quality alone does not mean that customers perceive that the service quality is good. As a
result, to achieve total service quality and competitive edge, functional quality plays the most
significant role. Functional quality differentiates the quality of services for different firms. As
a result, the firm with the best functional quality takes the competitive advantage as it offers
more value to customers than other competing firms. However, despite the impact of
functional quality, total perceived quality fails if the technical quality fails.
3.2.1 The Perceived Service Quality
The perception of quality is not fully embedded in the quality dimensions. Quality is
highly subjective, and this complicates the measurement of quality. Good perceived quality is
obtained when the experienced quality meets the expectations of the customer; that is, the
expected quality. The complexity arises because the expected quality is a function of a number
of factors, namely:
- marketing communication
- word of mouth
- company/local image
- price
- customer needs and values
The level of total perceived quality is not determined simply by the level of technical
and functional quality dimensions, but rather by the gap between the expected and
experienced quality. For this reason, firms should take due diligence in managing customer
expectations to secure the perception of quality. Companies should give realistic promises to
their customers to avoid the likelihood of creating a mismatch of customer expectations and
experiences (Grönroos, 2007).
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3.3 Models for Measuring Quality of Services
There are several models that are useful for measuring the quality of services.
3.3.1 Synthesized Model of Perceived Service Quality
This model merges the technical quality gap and functional service gap into total
service quality gap. The customer experiences influencing these gaps are divided into
experiences of a technical service package and a functional service package, respectively.
These packages are, of course, blended into a total service package. The human and physical
resources that influence the two types of the packages are listed on the respective packages.
The model also encompasses the main features that impact the expectations (Grönroos, 2007).
These features are image and other factors like branding.
3.3.2 The Gummesson 4Q Model of Offering Quality
This model is developed through the combination of the perceived service quality
model and goods-oriented quality notions. The model arises from the fact that goods and
services are fragments of the services offered to customers, thus combining the services and
goods elements. The model encompasses expectations and experiences variables as well as an
image and brand variable. Brand relates to the specifics of the product while the image
indicates the specifics of the firm of the seller (Grönroos, 2007).
The model carries two key concepts on either side of the model. The left side is known
as the sources of quality, and it encompasses: Design quality, which refers to how well the
service and goods elements of the product, and the combination of them into a functioning
package, is developed and designed; and production and delivery quality, which refers to how
well the package and its elements are produced and delivered, compared with the design. On
the other hand is the concept derived from results and it includes:
Relational quality: This refers to how the customer perceives quality during the
service processes; and
Technical quality: This refers to the short-term and long-term benefits derived from a
package.
3.4 Quality Measurement Instruments
Broadly, quality is the measure found by comparing the expectation and the
experiences of customers over a number of qualities. This indicates customer satisfaction as
assessed based on their perception of the services. There are two main instruments that are
30
used to measure services quality: Attribute-based measurement instruments, and Qualitative
measurement instruments (Grönroos, 2007).
3.4.1 Attribute-Based Measurement Instruments
The most common attributes-based instrument of measuring the quality of the services
is the SERVQUAL instrument. Under a SERVQUAL approach, a number of attributes that
describe the features of a service are defined, and after that respondents are asked to rate the
service on these attributes. Ten determinants were found to characterize customers' perception
of the service, and they are summarized as follows:
1. Reliability involves consistency of performance and dependability.
2. Responsiveness concerns the willingness or readiness of employees to provide
service.
3. Competence means possession of the required skills and knowledge.
4. Access involves approachability and ease of contact.
5. Courtesy involves the politeness, respect, consideration, and friendliness of
contact personnel.
6. Communication means keeping customers informed in a language they can
understand as well as listening to them.
7. Credibility involves trustworthiness, believability, honesty, and having the
customer's best interests at heart.
8. Security is the freedom from danger, risk, or doubt.
9. Understanding/Knowing the Customer involves making the effort to
understand the customer's needs.
10. Tangibles include physical evidence of the service (Grönroos, 2007).
Through different studies, the determinants were scaled down to five determinants
which include:
1. Tangibles: This determinant describes the physical status of the service firm
and the employees’ appearance.
2. Reliability: This describes the ability of a firm to offer a service with the
agreed timeline and without errors.
3. Responsiveness: This indicates the employees’ willingness to help the
customers at all levels.
4. Assurance: This shows how the employees' behavior impacts the confidence of
31
customers.
5. Empathy: This indicates the firms’ ability to understand customers’ problems
and interests (Grönroos, 2007).
The SERVQUAL typically uses 22 attributes/questions that explain the five
determinants. Respondents or customers are asked to state what they expected from the
service and how they perceived the service. Based on the discrepancies between expectations
and experiences over the 22 attributes, an overall quality score can be calculated. The score
derived compares experiences and expectations. The more this score shows that experiences
are below expectation, the lower the perceived quality.
3.4.2 Qualitative Measurement Instruments
This model focuses on the qualitative aspects of a service, unlike SERVQUAL, which
is highly quantitative. The critical incident approach is the most used instrument under the
qualitative instruments. The methodological approach is to ask respondents, in this case
customers with experiences of a given service, to think of situations where the service, or any
part of the service process including the outcome of that process, clearly deviated from the
normal, either in a favorable or unfavorable way (Grönroos, 2007). These are critical
incidents. Then the descriptions of the critical incidents and the reasons for them are analyzed,
in order to find out what kinds of quality problems exist and why these problems occur.
3.4.2.1 Seven Criteria of Good Perceived Service Quality
There are seven criteria used to establish the level of perceived service quality from a
qualitative perspective. The criteria are integration of available studies and conceptual work.
These criteria are:
1. Professionalism and Skills: The criterion is based on the belief that the service
provider has adequate resources that are essential to solving their problems in a
proficient way. The criterion is outcome-related.
2. Attitudes and Behavior: The criterion relates to customers’ contact with the
employees and how the employees are concerned about them and interested in
solving their problems in a friendly and spontaneous way.
3. Accessibility and Flexibility: The criterion dictates that the service provider
should set their system in a manner that would it would be easy for customers
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to get access to the service and that they are prepared to adjust to the demands
and wishes of the customer in a flexible way.
4. Reliability and Trustworthiness: The service provider’s employees and systems
should help the provider to keep promises and perform with the best interest of
the customers at heart.
5. Service Recovery: Whenever something goes wrong or something
unpredictable happens, the service provider will immediately and actively take
action to keep them in control of the situation and find a new, acceptable
solution.
6. Servicescape: The physical surroundings and other aspects of the environment
of the service encounter support a positive experience of the service process.
7. Reputation and Credibility: The service provider's business can be trusted and
gives adequate value for money, and that it stands for good performance and
values that can be shared by customers and the service provider (Grönroos,
2007).
The first criterion is outcome related (technical), and the following five criteria are
process related (functional) while the last criterion is image related. The criteria act as
guidelines for the analysis of research related to satisfaction.
3.5 Perceived Service Quality versus Customer Satisfaction
The perceived service quality model offers a conceptual framework for understanding
the features of a service. Thus, the model acts as a basis for developing a service offering with
a certain quality, that in turn meets the customers’ satisfaction. The perception of service
quality comes first, followed by a perception of satisfaction or dissatisfaction with this
quality. The perceived quality enforces the relationship quality of a service. The model is
static in nature. The dynamic nature of this model is brought about by the image factor of a
service (Grönroos, 2007).
3.5.1 Customer Feedback
Quality is the basic measure of a company’s performance under the marketing
concept. However, to ascertain this measurement, the company must obtain the customers’
feedback. Basically, customer feedback measures the last and most important gap in the
service delivery process; the gap is the difference between what customers expected and what
33
they perceive was actually delivered by the company (Webster, 1994). The company has to
define what to measure using the feedback obtained. For instance, the process requires the
customers’ expectations have to be determined. The customers define quality, and in effect,
customers define the standards for evaluating company performance. Internal measures may
be important in delivering value and meeting expectations but may not reflect true customer
satisfaction or lack thereof (Webster, 1994).
Customer feedback is categorized into five principles, namely:
1. Know why you are measuring and how the results will be used to improve
performance.
2. Let customers define what to measure.
3. Continuously monitor company performance versus competitors' performance.
4. Track the internal processes that are tied to the results customers value as well
as the end results themselves.
5. Communicate the results throughout the organization, to everyone involved in
the value delivery process (Webster, 1994).
These principles dictate that a company must learn to evaluate itself, and its
management, based on specific measures of customer satisfaction. The reason behind this
need is that the process of measurement must start with the customer.
3.5.2 Importance of Customer Complaints
Customer complaints are a part of customer feedback and a great value in determining
the success of a business. The complaints enable the company to make corrections on various
aspects of their services. Complaints are essential in understanding the ever dynamic customer
expectations as well as in providing the management with key information that might not
reach them through the normal channel (Webster, 1994). Also, complaints are essential in
maintaining customers. The cost of satisfying an unhappy customer is usually much less than
the cost of acquiring a new customer. Companies must learn to listen to the customer, which
can be achieved through an appropriate customer complaint tracking system.
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4 Relationship Perspective
As discussed earlier, customers are the key component of attaining the organizational
goals. Therefore, every firm is working tirelessly to win over the customer. Marketing offers
an avenue through which customers are easily reached. The main failure of the traditional
marketing strategies is that they focus more on facilitating purchases than on the maintenance
of existing customer relationships. Although gaining new customers is important, keeping the
customers is equally, or even more, important (Grönroos, 2007).
The new marketing concept has resulted in a paradigm shift of strategies, in that the
focus has shifted from one-time transactions to ongoing relationships. A marketing process
views relationships building as a logical outcome of the notion that every business is a service
business. In consumer marketing, the relationship is with individuals; in industrial marketing,
it is with organizations (Webster, 1994). Trust is developed through repeated transactions and
as a consequence results in loyal customers. Repeat purchases and loyal customers are the
main drivers of profitability for most businesses. It costs much less to service an existing
customer than to create a new one. Studies suggest that to acquire a new customer requires
spending about five times more than is needed to keep an old customer's loyalty (Webster,
1994). Alternatives need to be established that will help marketer view customers as partners
in business in order to maintain appropriate relationships between parties in the marketplace.
This approach is referred to as a relationship perspective, which offers better benefits than the
commonly used exchange perspective (Grönroos, 2007).
The dynamics in the business world have resulted in a change in how businesses
interact with each other. Traditionally, the market players viewed each other as opportunities
or threats. With today’s need of gaining a competitive advantage, the firms are looking for
strategic partners that will help them to differentiate by using those partners’ strengths, a
combination of elements of product, service, advice, and logistics, that the firms themselves
do not have. No company today can operate exclusively by using its own abilities and
resources and still maintain efficiency while creating a value for its customers and at the same
time be successfully competing with others. No company has sufficient resources to satisfy all
the clients’ needs. A company depends on its relationship with suppliers, distributors,
customers, and even competitors (Ford, 2009).
In this effect, a management challenge arises where the decision-makers are required
to cultivate and manage these relationships so as to sustain and grow their businesses (Ford,
2009). Moreover, companies have to strategize appropriately to reap the highest benefits of
35
the relationships. Through the achievement of relationship advantages, companies improve on
their competitive position. Thus, the competitive advantage of a company is based on its total
set of relationships, which differs from the traditional view where the competitive advantage
is based in terms of products, services, and markets (Ford, 2009).
4.1 Relationship Strategy
There are many competing products in the market, and the customers have to choose
what to buy depending on mutual influences in the market interactions. The issue is
significant in low customers markets like business-to-business markets and service markets.
Therefore, under a relationship perspective, the objective of marketing is to identify and
establish, maintain, and enhance, and when necessary, terminate, relationships with customers
(and other parties) so that the objectives regarding economic and other variables of all parties
are met (Grönroos, 2007). This is achieved through a mutual exchange and fulfillment of
promises.
The relationship strategy contains two categories of elements: strategic and tactical
elements. The tactical element has three requirements, which are: (1) to seek direct contacts
with customers and other business partners; (2) to build a database covering necessary
information about customers and others; and (3) to develop a customer-centric service system
(Grönroos, 2007). The requirements for the strategic element are: (1) to redefine the business
as a service business and the key competitive element as service competition; (2) to look at the
organization from a process management perspective and not from a functionalistic
perspective; and (3) to establish partnerships and a network to handle the whole service
process (Grönroos, 2007).
Relationships are built on three important virtues of trust, commitment, and attraction.
Trust dictates that parties will behave in a certain predictable way in a given situation. Trust
comes in four subcategories: generalized trust, system trust, personality-based trust, and
process-based trust. Mainly, trust depends on past experiences, contracts, regulations, and
social norms as well as personality factors. Commitment describes the desire of the parties to
remain and maintain a relationship while attraction describes what causes the parties in a
relationship to be interested in each other (Grönroos, 2007). Attraction is mainly dependent on
financial, technological, or social factors.
Beyond trust, commitment, and attraction, a relationship requires a degree of
interdependence, which means that a business flourishes as a result of its interdependence
with its customers as well as with other parties and affiliations. Relationships are cultivated
36
through provided solutions at low prices. However, caution is required when companies try to
achieve low prices. Low price, if not properly managed, often results in poor quality, poor
service, production problems associated with changing vendors frequently, interruption in
supply, and excessive inventories throughout the system (Webster, 1994). Thus, low price
does not always mean lowest total cost.
Information technology plays a crucial part in the relationship marketing concept. IT
is an important facilitator in the context of consumer marketing, in that it helps in interactive
marketing and managing the information collected from the customers (Webster, 1994). IT
solutions in a business-to-business market allow relationships to flourish through binding the
members of the network together; IT enables the firms to treat each other as a partners. For
instance, just-in-time (JIT) supply systems are the epitome of the strategic partnership
(Webster, 1994). JIT is guided by two objectives: lower inventories and better quality, both
being crucial in new marketing concept as they reduce costs and improve customer value.
4.1.1 Empowering Managers in the Relationship Networks
Managers are the foundation of the decision making system of a company. They are
tasked with the development of appropriate strategies that would enable the company to
exploit their relationship, without which conducting business would be impossible and a
company would be isolated in the network. Without competent managers, companies would
be unable to exploit their own skills and resources to solve problems for customers and to sell
their offerings. It is through these relationships that companies cope with their increasingly
widespread technological dependence on others and the need to develop and tailor offerings to
more specific requirements (Ford, 2009).
By definition, a network refers to a structure comprising of a number of units that are
related to each other by specific threads. These threads are the relationships between the
various units in a network. The threads are developed through the investment of physical and
human resources by these units under the guidance of their managers. Depending on the
position of a company in a network, the interconnections can be viewed in two ways. First, a
company creates its own relationships while, on the other hand, a company arises from its
relationships. Networks are essential in the development of new products or standards. In the
production of a new product, companies may agree to introduce the product jointly or
separately. Under joint introduction, a multiple relationship arises (Ford, 2009).
The management of a company must remain vigilant while monitoring the operations
of a network. This is because there are a lot of dynamics in the business environment.
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Additionally, limitations exist in the knowledge and information available regarding the ever
changing business environment. The environment dynamics results in difficulties in managing
the interactions with other companies. Each has a network position, consisting of its
relationships with others and its own resources and those that exist within and through its
relationships. These resources - technical, economic, and social - are the core of each
company's strength and the basis for its growth and development in a rapidly growing and
evolving market. Depending on how well a company manages its relationships, it gains
competitive advantage, which arises from the strengths derived from having relationships with
resourceful partners (Ford, 2009).
4.1.2 Customer Knowledge
Under relationship marketing, firms have to establish a trusting relationship with
customers; thus, the need to know the customers better. In the wake of this need, businesses
have to develop a customer database. This database is essential for maintaining customers’
basic information that ensures a relationship-oriented customer contact. In addition, databases
can be used for a variety of marketing activities, such as segmenting the customer base,
tailoring marketing activities, generating profiles of customer types, supporting service
activities, and identifying likely purchasers (Grönroos, 2007). This database acts as a platform
for creating a customer-oriented service system. Successful development of such a system
depends mostly on four key resources, namely: employees, technology, customers, and time.
4.1.3 Customer Relationship and Loyalty
A good system is crucial in relationship marketing, since the success of the
relationship marketing is highly dependent on the attitudes, commitment, and performance of
the employees as well as a well-organized and continuous internal marketing process. The
resulting effect of this system is a good relationship with customers. Customer relationship is
viewed in terms of the continuous contact between the customer and the business. A customer
determines whether or not a relationship has developed. A relationship has developed when a
customer perceives that a mutual way of thinking exists between customer and supplier or
service provider; this is seen as customer loyalty (Grönroos, 2007).
It is difficult to establish whether a relationship has been developed, but the marketer
should measure the existence of a relationship. The mutual relationship requires that
customers should be viewed as partners, where marketers should aim at doing something with
and for the customer and not doing something to the customer. Marketers should know when a
customer is a customer. Under the relationship perspective, customers are customers on a
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continuous basis – and they should be treated as such, regardless of whether at any given point
in time they are making a purchase or not (Grönroos, 2007). However, not all customers need
relationships with suppliers and as such, firms should define the extent to which a relationship
perspective is profitable. Also, some relationships are passive, which requires relationship
reevaluation.
4.2 Evaluating Relationship
There are several relationship benefits to customers, which are grouped into three
categories:
Confidence: Reduced anxiety, faith in the service provider, and a feeling of
trustworthiness of the service provider.
Social benefits: Personal recognition by employees, customer being familiar with
employees, the development of friendship with employees.
Special treatment: Extra services, special prices, higher priority than other customers
(Grönroos, 2007).
As a result, the overall benefit is that the relationship itself adds to the total value
perceived by customers.
Financial benefits also come into play in relationships. Financial relationships are of
two kinds: (1) increased wealth and revenue-generating capability; and (2) lower costs of
being a customer (Grönroos, 2007). However, the extensive financial investments are usually
required to satisfy the specific requirements of the firms being in a relationship (Webster,
1994). These investments provide totally linked and interdependent processes that are crucial
for achieving the organizational goals. For this reason, long-term relationships are essential
for both parties and are key to superior value delivery.
Relationships are highly dependent on time, as time defines the parameters within
which a relationship exists (Ford, 2009). The past and the future affect current behavior in a
relationship and experiences, expectations, and promises underlie the interaction within a set
time frame. Therefore, time offers a good dimension which dictates how relationships could
be managed and evaluated. Managers are prompted by time to change their emphasis away
from a single discrete transaction while analyzing relationships. Through time, relationships
are analyzed by tracking how things unfold in the relationship over time and changing these
when appropriate (Ford, 2009).
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4.3 Relationship Marketing
Relationship marketing is a perspective of how value is created for customers and how
the relationship between the firm and a customer can be characterized. Hence, marketing is
the management of customer relationships. Relationship marketing is marketing based on
relationships, networks, and interactions, recognizing that marketing is embedded in the total
management of the network of the selling organization, the market, and the society. In
summation, relationship marketing is created through integration of interactions and
communication. (Grönroos, 2007).
As stated earlier, the new marketing concept is built on the foundation of a strategic
relationship between the company and the customer. However, the company cannot handle the
enormous obligation of providing quality alone. The company depends extensively on its
relationship and interaction with other parties and affiliations (Webster, 1994). Suppliers,
employees, and consultants play a critical role in the company’s ability to meet the customer
expectations. As a result, value delivery is a shared problem for all the players in the system
with a goal of focusing on the customer's constantly changing definition of value.
Marketing plays a critical role because the task must be approached from the
perspective of the customer, whose definition of value must be translated into specific
capabilities and activities. Performing those activities involves specific skills and resources
that the firm must either develop and maintain internally, or acquire through strategic
partnering (Webster, 1994). Therefore, marketing is equally responsible for guiding
relationships with suppliers and customers, as part of its responsibility for value delivery.
Partners are crucial for the company’s goal realization. For instance, suppliers are crucial, as
through their timely offering of resources, the company can meet its obligations to customers
within the time parameters established by their relationship agreement.
The elements of relationship management entail the fact that there are many people
involved in the processes of developing and fulfilling the offering that is traded between the
marketing parties. The trade between the parties is a relationship that represents an interaction
between customers and suppliers (Ford, 2009). The interaction is based on these parties’ past
experience and their expectations of any possible future interaction. Each interaction and each
purchase or sale are understood in the context of that relationship. Thus, no single type of
relationship is "right" for either buyer or supplier in all circumstances. This means that there is
no single measure of the "quality" of a company's relationships (Ford, 2009).
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4.4 Relationship Quality
Relationship quality can be described as the dynamics of long-term quality formation
in ongoing relationships. Interactions are the basic phenomena in quality and value formation;
for this reason, the perception of relationship quality occurs in ongoing interactions, which
may be either continuous or discrete. The analysis of relationship quality follows a framework
of a continuous flow of acts, episodes, and sequences which form the relationships. For this
reason, from a dynamic perspective, quality is perceived at every level of the relationship
framework, and thus accumulating to an overall perception of quality at any given point in
time (Grönroos, 2007). Thus, it would be logical to conclude that an analysis of the
relationship demonstrates the multitude of acts and episodes that contribute to the long-term
formation of quality and make managers more aware of the range of customer contacts that
have to be managed from a quality perspective.
4.4.1 Liljander–Strandvik Model of Relationship Quality
The analysis of the dynamic perspective doesn’t offer the detailed aspects of the
dynamics of long-term quality formation. To address the long-term dynamics of quality
formation, there is the Liljander–Strandvik model of relationship quality. The model contains
four aspects, namely:
• It makes a distinction between episode level quality and relationship level quality.
• It incorporates satisfaction and customer perceived value in a quality framework.
• It enables an extension of the traditional limited disconfirmation notion used in static
models of perceived service quality, to include a range of comparison standards.
• It includes customer behavior variables (Grönroos, 2007).
Using the model, the episode quality is compared with the customers’ perceived
sacrifice. In turn, a customer can form a perception of the value that they derive, which in
effect leads to satisfaction or dissatisfaction with the service. The difference between the
episode level and relationship level of a service is highly dependent on the value derivation of
the service to the customer (Grönroos, 2007). Under episode level, episode quality is
compared with episode sacrifice while, under relationship level, quality is compared with
relationship sacrifice.
The satisfaction derived from a given episode plays a major role in establishing the
future behavior of customers. However, the future behavior of customers is influenced by
other factors. One of the factors is the bonds existing between the customers and the service
provider. The bonds are legal, economic, technological, geographical, and time-related bonds
41
as well as knowledge-related, social, cultural, ideological, and psychological bonds. The
customer-perceived episode level value and the bonds between customers and service provider
have a significant influence on the service provider’s image (Grönroos, 2007). The image
incorporates the customers' old and recent experiences with the firm and builds a bridge to the
relationship level of the model. The image functions as a filter when the customer perceives
the next episode or service encounter.
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5 Case Studies
The two case studies were conducted in order to understand the relationship between
the companies’ strategy, quality of products and services, as well as their profitability and
competitiveness. The first case study examines Toyota Motor Corporation; a company that is
rightfully considered to be the epitome of quality products and services, which are delivered
through its foundational total quality management discipline. However, dduring the so-called
“recall crisis” of 2008-2010, the company lost hundreds of millions of dollars and came close
to completely shuttering it’s image as a producer of safe vehicles. This case study provides a
vivid illustration of a company with a strong internal commitment to quality, yet that appears
to produce poor quality products, and as a result is rapidly losing its customers’ business. With
the benefit of hindsight, we are able to trace the events as they unfolded for Toyota and learn
from their oversights when underestimating the importance of customer feedback and a strong
business relationship network.
The transformational journey of the second company that was chosen to be reviewed is
unfolding in front of our eyes. IBM recently experienced a significant drop in its share price,
and the following case study is posed so as to understand the possible reasons behind the bad
publicity that the company is currently experiencing. The case study inevitably ended up with
a review of the company’s strategy as well as the implications of the company’s market
position.
While the first case study showed a direct link between the customers’ perception of
the company’s quality, leading to degraded financial performance, the second case study has a
bold objective to show the reverse relationship. Additionally, the case study itself serves as an
introduction to original research from a very narrow scope with a minuscule data sample;
given the author’s limited ability to obtain the necessary data. Its aim, however, is to show a
correlation between IBM’s decreasing revenues and its current level of service quality.
The purpose of the research, as will be described again in detail, is to measure the
current level of quality that IBM is delivering to its B2B customers, and the author attempts to
make no other conclusion from this research. However, the IBM case study that is to follow is
arguing that the company’s strategy, as it will be described in the case study, is the cause of
the decreasing revenue and the implication for the degraded quality of services.
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5.1 Toyota Learns to Re-Focus on Customers
Part A: The Toyota’s Quality
The From very humble beginnings that started in 1890 with the production of wooden
hand looms used for weaving cloth, Toyota has risen to become today’s world leader in the
automotive industry. Toyota Motor Corporation is a Japanese automotive manufacturer2. As
of November 2014, Toyota is the twelfth largest company in the world by revenue and has
maintained its status as the largest (by production) automobile manufacturer since the year
20123.
The company started the production of passenger cars in 1935. A turning point in
Toyota’s transformation is credited to one of the members of the management team, Eiji
Toyoda, and manufacturing guru, Taiichi Ohno. In the early 1950s, Eiji Toyoda visited Ford’s
plant in the United States to experience for himself the magnificence of the Ford production
system. At that time, the Ford plant was manufacturing 8000 vehicles per day, while Toyota
had only made a total of 2500 vehicles in the previous 13 years4.
The executives at Toyota realized that the way they had been operating was not
sustainable for business. They needed to revamp their systems in order to be a contender in
the automobile market. In order to achieve this, they implemented a two-pillar strategy. The
first pillar was that of continuous improvement. What this meant was that everything was
supposed to be challenged during the process of continuous learning. This would lead to the
surfacing of flaws, which could then be fixed. This pillar ensured that Toyota accepted
change, which was essential in order for them to move from where they were.
The executives felt that this process could only be achieved when there was mutual
respect for people within the organisation, which is what the second pillar was about. This
second pillar—a respect for people—embodied creating an environment of mutual trust
between employees and employers. This involved employers giving their workers job security
and allowing them to actively take part in improving their jobs. Happy employees work better
with management toward one common goal for the improvement of the company. The
management, of course, has to define what that common goal is, how to get there and how to
remove any obstacles that may be in the way of the attainment of that goal.
2 "Overview". Global website. Toyota Motor Corporation. 2014-03-31. Retrieved 2015-02-06. 3 "World motor vehicle production OICA correspondents survey without double counts world ranking of manufacturers year 2012". OICA. March 2013. Retrieved 2015-01-20. 4 Toyoda, Eiji (1987). (1987). "Toyota - Fifty Years in Motion. Tokyo: Kodansha International. ISBN 0-87011-823-4.
44
One of the things that Toyota executives realized quickly was that the quality of their
cars had to improve, as did their productivity. They wanted to emulate Ford’s way of mass
producing vehicles, but it was not very practical for their situation. Ford had massive amounts
of capital that Toyota did not. Ford also had a big market for a single car model while Toyota
had a smaller market that wanted a diverse range of vehicles. During his visit to the United
States, Eiji Toyoda saw a lot of useless production taking place within the Ford facilities.
Components were made en masse only to be placed in storage. Workers and their machines
were constantly busy, but they were not necessarily being productive or efficient. Things
appeared to be very disorganized and factories looked more like warehouses. Above all,
defects along the production line were hardly noticed in the hustle and bustle of mass
production.
Clearly they could not just take Ford’s way of doing things and implement them in
their manufacturing plants. Toyota executives needed their workers to be ingenious and make
the basic production flow and make the functions work for their company. They needed a
balance between quality products and getting the products out to the public in good time.
Thus, the “Toyota Way” emerged. After consistently working to improve their systems in
their quest for quality, Toyota gained a reputation for cars that had a longer lifespan than
American cars and that needed fewer repairs as long as they were being maintained according
to recommendations. Their models were also dubbed to be superior over other Japanese car
makers. This superiority was due to the formulation of the Toyota Production System (TPS)
which essentially was a blueprint for efficient processes. Taiichi Ohno is considered to be the
originator of this methodology, which later became known as “Lean Manufacturing.”
TPS was based on the rudimentary system called “jidoka” that was developed by
Toyota’s founder, Sakichi Toyoda, during his first designs of automated loom. The jidoka
system focuses on automation with a human touch and quality during the production process.
It is a way of ensuring that mistakes are identified and corrected quickly, thus ensuring the
continued production of high-quality products. Sakichi infused his enthusiasm for constant
improvement into his business enterprises. When he tasked his son Kiichiro to take on the
initial production of cars, Kiichiro followed in his father’s footsteps. The Toyota company did
not collapse in a war-torn Japan under Kiichiro’s watch because he implemented his father’s
philosophies, with a few additions of his own, such as just-in-time production, which avoided
overstocking materials and products that were not needed immediately. Toyota adopted the
supermarket concept, which they also observed in the United States, which was a way of
doing things where individual items were replenished according to need, i.e., as soon as stocks
45
began to run low. This reduced the amount of waste taking place and allowed for better
tracking of inventory (Liker, 2004).
A large part of the quality management philosophy implemented by Toyota has to do
with finding problems and solving them as quickly as possible. The first step is to define what
constitutes a problem in relation to what Toyota wants to achieve. The next step is to not look
at the problem as a whole, but to break it down into smaller, more manageable sections after
which the root cause of the problem can be isolated. Once the root of the problem is known,
employees can then begin to map out possible solutions, and then determine which of these
options is the best solution. This best solution is then implemented, preferably on a trial basis
first to ensure that it really is the best. This can only be assessed after its impact has been
checked. If there are still problems, then the solution can be adjusted based on the results of
the assessment. These philosophies are applied broadly to the whole of Toyota regardless of
departmental mandates.
One of the changes that were implemented was the practice of stopping the machinery
in the assembly plant periodically to check if there were any flaws in the products being
manufactured. This development came about when an American was hired in one of their
plants. The American kept machinery and people constantly running without ever doing
quality checks. Fujio Cho, the then-president of the Toyota Motor Corporation, is quoted to
have said,
“...if you are not shutting down the assembly plant, it means that you have no
problems. All manufacturing plants have problems, so you must be hiding your
problems. Please take out some inventory so the problems surface. You will shut down
the assembly plant, but you will also continue to solve your problems and make even
better-quality engines more efficiently (Liker, 2004).”
Identifying and fixing quality issues even by means of stopping the production had
always been of a paramount importance for Toyota. A focus on quality had been indoctrinated
into all Toyota employees. They understand that when they make quality products, they are
doing the right thing for the company, which translates to benefits for the employee, the
customer and the entire society. Ultimately, it is a cycle that leads to everyone realizing
benefits from this service excellence.
All of these efforts towards ensuring quality production have brought astounding
results for Toyota over the years. Every employee was turned into a quality control inspector,
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which ensured a quality that was superior to other products on the market. Stopping over-
production ensured that hidden waste was eliminated, which helped to save the company
considerable amounts of money. Quality was now built into the work place and the speed of
business processes was greatly improved. By the yearly 2000s, Toyota became the third
largest vehicle manufacturer in the world after General Motors and Ford. Despite being third,
they were posting larger profits than the other companies.
By the year 2007, Toyota was at its peak. Reports of customer satisfaction were
pouring in from everywhere. They had established customer loyalty, and the fantastic quality
of their cars was the talk of the town all over the world. Making the customer happy was
Toyota’s focus, and even in instances where keeping their customers happy cost them money,
Toyota did not falter in this regard. The company became a trendsetter in quality
manufacturing and process engineering, setting new standards for operational excellence.
Toyota transformed the way people viewed Japanese products, from being inferior to being
synonymous with the highest quality.
Part B: Toyota Crisis
With all the success and international recognition, and with the genuine desire to
produce quality vehicles for their customers, Toyota had not necessarily had a perfect track
record. It is important to understand the background to the events unfolding before the the
massive recall crisis of 2009 and 2010, which cost Toyota hundreds of millions of US dollars
and had nearly damaged its reputation permanently.
In 2008, oil producing nations raised the prices for oil. This led to global oil prices
being hiked dramatically. The American consumers started opting for smaller fuel efficient
cars instead of their preferred big fuel guzzling SUVs. This was good news for Toyota
because the company already produced a diverse range of vehicles in the American market.
They had established manufacturing plants in America years before and actually intended to
open another one. All Japanese car manufacturers looked like they would reap great benefits
from this crisis because they made small cars. Toyota had an edge, though, because of their
world leader status in the automotive industry.
Unfortunately, it was at this time that the global recession hit. People no longer had
ready access to loans and so they did not have the funds to buy new cars. Toyota lost about $4
billion in revenues and lost approximately 40% of their client base in North America.
Companies that were planning on expanding in anticipation of growth, like Toyota, had to put
their plans on hold. Many corporations embarked on massive cost-cutting exercises, including
47
laying many people off and closing down manufacturing plants. Toyota did not do this,
however, because it would have gone against the principles outlined in the Toyota Way. They
were motivated to find ways to circumvent the effects of the crisis without taking away the job
security of their work force or compromising on the quality of their cars.
Successfully continuing with the Toyota Way meant that they had to slash 12.5% off
operating costs in a short space of time. It seemed like a lofty goal to an outsider looking in,
but it was a target that the board at Toyota intended to reach. Rather than forcing people into
retirement to achieve this goal, the executives offered voluntary retirement to certain members
of their labor force. Not everyone was elegible for this because Toyota did not want to risk
losing key trained personnel. Management saw no reason to allow what they viewed as a
short-term problem to dictate the long-term future of the company. Only 7% of those
employees that were given this option took up the offer; the rest stayed (Liker, 2011).
With this background, it is apparent that Toyota had some changes happening
internally and perhaps may had been dealing with too many problems all at once. In 2009, a
much publicized accident involving one of Toyota cars took place. The driver of a Lexus ES
350 failed to control the vehicle because the accelerator pedal got stuck to the floor mat in the
vehicle. Four people died in that accident, and one of the passengers was on a 911 call that
would be made available to the public. Toyota had performed a recall in 2007 for this very
problem, and it led to people doubting whether they had really fixed the problem. Ironically,
their staunch focus on quality seemed to be what had caused the accident because the floor
mats were of high quality with thick and rigid material. The fallout from all the bad publicity
led to three more vehicle recalls related to speed control that affected more than 7 million
vehicles.
The truth of what took place is a lot less glamorous than the panic theories that
surfaced after the 2009 accident. The accident resulted from a floor mat belonging to another
vehicle that was put in the Lexus. The 2007 recall for this problem could not have anticipated
that such a thing would happen. Toyota engineers assumed drivers would use all the correct
appliances for their cars. This particular floor mat was too big, which led to it inextricably
trapping the accelerator pedal. This was a problem that Toyota engineers had not seen coming,
and for a long time, many months after the accident, the executives in Japan did not appear to
take it seriously.
Toyota executives in Japan were detached from the American market and expected the
American branch to solve its own problems within the confines of the Toyota Way. However,
dealers of Toyota vehicles in America were ill prepared to deal with customer queries.
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Customers had complained about this problem after 2007, but nobody could advise them on
what to do. In turn, this problem was not articulated back to Toyota engineers, and so they did
not come up with a solution to the problem until it resulted in a fatal incident with
international publicity. In their quest for excellence and quality, Toyota had overlooked the
need for customer feedback.
Initially, Toyota had issued a recall of all-weather floor mats for Lexus ES 350s and
Toyota Camrys (which share the same platform) in 2007. That recall came as a result of five
customer complaints associated with four accidents. That recall affected about 55,000
customers and started to cast a shadow on Toyota when floor mats were implicated in the fatal
accident. Toyota announced a recall via what is known as a Consumer Safety Advisory to
distinct drivers, which often meant that the recall did not necessarily take place immediately
after it was announced. Toyota was still investigating the best way of dealing with improperly
installed or incorrect floor mats, and so drivers were not advised to bring their cars into
dealers immediately. After Toyota engineers studied the floor mat entrapment, and—with the
floor mat recall announced—Toyota began notifying customers by a letter approved by the
NHTSA per regulations.
The fatal car accident occurring on Aug 28, 2009, had dramatically changed the stakes
and resulted in the first large recall on Nov 25, 2009, affecting 4.2 million vehicles (Liker,
2011).
After the first recall related to pedal entrapment—issues caused when the accelerator
was pushed down to the floor and became trapped/caught in a misplaced or unsecured floor
mat—there were several additional issues that surfaced on the attention of media and
influenced Toyota to make subsequent recall actions. The second major issue was with the
behavior of the acceleration pedal, which was named “sticky pedal behavior,” a structural
problem in the accelerator, which caused the pedal to be hard to push down and slow to return
to a resting position. Such behavior of the accelerator pedal had caused a major worry within
the Toyota drivers, who believed the issue was linked to the first issue where the pedal was
not functioning properly, causing a car to accelerate uncontrollably. Yet another major recall
was of Prius due to the failure of braking capability due to the system switching to ABS
during rough or uneven surfaces. This behavior had also caused the drivers to misunderstand
the cause and feel that since the speed was not decelerating, the breaks were not functioning
correctly (Liker, 2011).
The following table summarizes five major vehicle recalls that happened during the
end of 2009 and the beginning of 2010, as well as the key events associated with the recall
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crisis:
Aug.28, 2009 A fatal crash of a Lexus car in the US due to the gas pedal becoming
stuck was highly publicized that brought “unintended acceleration”
problems of Toyota cars to the light with increasing investigations by
NHTSA in the U.S..
Late of Sep., 2009 Toyota attributed the problem in the Lexus to the incompatible floor
mat, but their explanation couldn't convince NHTSA and the public
in the U.S..
Sep.29, 2009 Toyota issued a public safety advisory suggesting owners of specific
models about the ill-fitting floor mat issues in North America.
Nov.25, 2009 1st large recall for potential accelerator pedal entrapment problems
(ill-fitting floor mat), U.S. market, 4.2 million vehicles.
Jan.21, 2010
2nd large recall for sticking accelerator pedal problems, U.S. market,
2.3 million vehicles covering 8 models.
Jan.26, 2010 Toyota temporarily suspends production and sales of selected
vehicles in the U.S.market.
Jan.29, 2010
3rd large recall for potential accelerator pedal issues, European
markets; 1.8 million vehicles.
Late Jan., 2010 Toyota began issuing apologies and breaking silence with response to
the crisis under the tense pressures from public media and
governments in America.
Feb.5, 2010
Toyota’s CEO, Akio Toyoda, made public apology for the recalls
and announced global quality task force for focus on quality issues.
Feb.9, 2010 4th recall for antilock brake system (ABS) software problems on
2010 model-year Toyota Prius and Lexus HS 250, Japan and U.S.
markets.
Feb.12, 2010 5th recall for inspecting the front drive shaft on 2010 model year
Tacoma 4WD trucks, U.S. market.
Late Feb. to Mar., 2010 Three times testimonies to the Congressional Hearing in U.S..
Apr.19, 2010 Toyota agree to pay $16.4 million civil penalty imposed by NHTSA
in U.S. related to Toyota’s recall for slow-to-return and sticky
accelerator pedals, but Toyota denies NHTSA's allegations that it
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violated the Safety Act or its implementing regulations.
Source: Motor Trend Magazine (2010)
The effects of growing customer concerns, poorly handled communication, and
growing media attention had caused a snowball effect of panic and additional accusations,
which forced Toyota to critically reexamine their way of doing business.
As Toyota started to react to the “quality crisis,” they first went to resolve the clients’
concerns about the safety of vehicles through the dealerships and via their Customer Service
Centers. Their North American dealers played a huge role in managing the complex logistics
and helping customers feel that the company cared about them. Dealers were aware about how
frightened customers were, and they were trying to satisfy every customer. The amount of
calls to the call-center had risen from about 3000 calls per day to 96,000 calls after the
accident (Liker, 2011).
While Toyota had continued its investigations about the reported defects, it had to
assume the responsibility, and Toyota’s president, Akio Toyoda, had personally issued this
apology to customers: “We have not lived up to the high standards you have come to expect
from us. I am deeply disappointed by that and apologize. As the president of Toyota, I take
personal responsibility (Liker, 2011)” Yet it was the fact that his statement was issued 6
months after the fatal accident, and that during these 6 months, Toyota’s top management
didn't put the required level of attention to the matter at hand, the customers felt that company
wasn’t involved enough to resolve their problems. Toyota’s slow reaction can be explained by
the misunderstanding between the TMA (Toyota Motor of America) and TMC of Japan.
Headquarters in Japan believed that events which happened after the 2009 fatal accident in the
U.S. were just temporary problems, but not the crisis in its direct meaning. Only in mid-
January did TMC (where all main decisions were made) realize that the TMA’s situation was
not getting better and started to react and implement some actions in order to improve the
situation.
While there were some technical changes, it was primarily the communication that
was improved, both internally and with customers, the public in general, the media, and the
NHTSA. The major conclusion the company made was that it lost direct touch with customer
perspectives and customer concerns, and that communication barriers between engineers and
management in Japan and customer-facing personnel in the U.S. had resulted in further
problems with decision making and communication. These two main types of issues
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prevented the company from maintaining its strong reputation as the producer of safe and
quality products can be classified as the disjunction from client-orientation and
underinvestment in relationship management (Liker, 2011).
Disjunction from Client-orientation
Denial of the crisis situation is attributed to Toyota’s obsession with quality and
internally defined measures of quality delivery and root-cause analyses. With a regional and
cultural disconnect between the United States and Japan being big, Toyota quality engineers
had struggled to identify with the customers’ point of view since the produced vehicles were
at the highest quality based on Toyota’s internal specifications.
Toyota’s initial fall into denial was later reversed by the company reevaluating its
values and reinforcing its commitment-driven culture. Yet, if Toyota had not denied and
discharged the responsibility (even while finding no quality defect) at the very beginning, the
public would perceive that Toyota prepared to fix the problem and thus it would have
maintained its trust and image with its clients.
The Toyota team had many possibilities to predict the power of growing consumer
concerns over the accidents caused by the all-weather floor mats and unintended acceleration,
as well as the concerns coming from Europe about the sticky pedal functionality. They
underestimated the power and significance of these events. The under-reaction to issues with
the all-weather floor mats in a way of handling and communication and information about
consumer concerns was not shared between E.U. and U.S. subsidiaries and put the company in
a weak position to predict consumer dissatisfaction and avert the crisis.
Underinvestment in Relationship Management
Relationships with internal and external stakeholders were not identified and managed
well. The example with the sticky pedal shows how information was not shared effectively
between E.U. and U.S. regions. The company’s main stakeholders—its consumers—were
under-informed by Toyota, as there appeared to be no clear direction and instructions to the
public and other stakeholders on how to solve the problem. Additionally, the company’s
affiliates in the U.S. were impacted. Five U.S. factories were shut down to stop the production
and sales of eight models, resulting in 57% of Toyota’s 2009 sales being stopped. Toyota’s
1239 dealers in the U.S. were only instructed to take cars off their lots and increase their
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service staff for upcoming repairs. They felt no direction from headquarters. There was no
regular channels (e.g., conference calls) between the central engineering group in Japan and
other countries, plus there was no global access to the database of issues, thus other regions
didn't have information about all of the problems pertaining to the vehicles. For example, a
similar problem with the accelerator pedal happened a long time before the 2009 fatal accident
in Europe, but because of the lack of communication within Toyota, it went unobserved.
As a part of a cultural gap, there was poor consideration of the culture translation.
Americans expected more of a straightforward approach and felt that Toyota headquarters
were hiding something by not providing a clear statement; the solutions offered by Toyota
were appearing to Americans as temporary solutions or workarounds instead of fixes to real
issues. Many stakeholders believed that the Japanese “saving face” culture was the cause of
unwillingness to disclose any unpleasant information.
Toyota had many faithful consumers and supporters from independent firms who
provided their own analyses based on allegations from media and other legal parties who tried
to sue Toyota. These supporters provided their input via social media (Internet); however it
was like a drop in the ocean compared to the speed and the amount of news produced by teh
media. Information and facts provided by Toyota themselves were coming too slow to counter
arguments to the media and to help establish a more objective public opinion. Little
relationship with media or with the company supporters were in place as to work through the
possibilities and effects of various approaches in order to gain an acceptance on behalf of the
media.
Toyota’s Lessons-Learned
By the end of 2010, the following major changes were implemented by the company
and sustained during and after the crisis as the result of Toyota’s initiatives to improve the
flow of information, open communication channels, and the company’s focus on the
customer, as well as the reinforcement of the relationship network and implementation of
client-oriented quality management approach.
1. Toyota created a new position of Regional Chief Quality Officer. An executive
from each region (North America, Europe, Asia and Oceania, the Middle East, Africa, and
Latin America) was appointed to take on this role. Executives who took on this role were
given authority to make autonomous decisions related to quality and customer safety and a
shift in the approach to recalls from “when in doubt, study the issue further,” to “when in
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doubt, issue a recall immediately” took place starting in 2010. These executives also ensured
that any issues that were discovered in any region were quickly communicated to other
regions (Liker, 2011).
2. A global database of issues was created, so there would be no regional information
islands on any quality or safety issue. Access to the database was provided to all stakeholders
within the company, and there was established a regular meeting facilitated by the Quality
Task Force team to communicate issues to all regions (Liker, 2011).
3. Akio Toyoda and the board created a “Special Committee for Global Quality.” The
committee was made up of the new chief quality officers and a group of executives leading
business operations, and it was chaired by Akio Toyoda. The committee announced a six-
point plan focusing on quality process improvements and customer engagement (Liker, 2011).
4. Creation of SMART (Swift Market Analysis Response Teams), who were customer
facing quality engineers, traveling to customers to perform inspections and listen to
customers. These engineers started to rebuild the trust by direct and prompt contact with the
drivers of Toyota vehicles; they learned how the customers were using their cars and were
able to channel this information back to Toyota (Liker, 2011).
5. Creation of “Customer First” training centers in Japan, North America, Europe,
Southeast Asia, and China to provide team members with additional training on how to
integrate customer needs and feedback into their problem-solving and design processes more
effectively (Liker, 2011).
6. Internal communication about Toyota’s values and the set of behavior was
strengthened by Akio Toyoda creating a small paperback guide titled Our Attitude. These
were 10 core attitudes that were expected of every Toyota employee. Each page defined an
attitude and explained things that employees should keep in mind (Liker, 2011).
7. New initiative to increase contact with customers and create more opportunities for
listening was changing the two years of free scheduled maintenance program into a permanent
program. Initially, it was created as an incentive to increase sales after the sticky pedal recall;
however, Toyota leaders and dealers realized that the program was a great way to increase the
touch base with customers and hear their concerns (Liker, 2011).
8. Changes in R&D department in Japan were done to reassign 100 engineers to a
Design Quality Innovation Division with a focus on “going and seeing,” adding to existing
analysis from a human factor engineering standpoint and feeding that information into the
design process more directly. The members of this team specifically spend far more time in
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the field talking to customers and dealers (Liker, 2011).
9. To advance vehicle safety generally, Toyota invested $50 million in a new
Collaborative Safety Research Center near its Ann Arbor, Michigan, R&D operations. The
new center is taking an open-source approach to safety research, working with partners and
sharing insights and results with other manufacturers or anyone who can use the research
(Liker, 2011).
10. Increased usage of internet and social media (Facebook, Twitter, etc) to better
communicate with the customers directly (Liker, 2011).
Changes made in creation of the quality controlling matrix with a close interlock with
clients and information propagating within the company, as well as the creation of the roles
with authority to make decisions in the relation to quality and consumer concerns, had
empowered Toyota to prevent and control possible crises. Toyota updated the structure and
organisational culture with a client-orientation and open communication. A shift from a
hierarchical approach in management to a flatter organization with matrix cross-functional
divisions was implemented. It aimed to streamline communication and improve the speed at
which organizations were making and executing critical decisions. The members in the
Toyota relationship network received autonomy and decision-making power, as well as access
to critical information allowing them to function with the best interests of clients.
While many of the improvements appear to focus and improve the efficiency of the
information and communication, it was the tremendous effort that Toyota placed on
understanding their clients better and focusing on their clients’ needs. As Akio Toyoda put it:
“One of the lessons that we have learned is that safety and peace of mind are two different
things. I would say categorically Toyota’s vehicles are safe, but we could have done better in
terms of explaining [everything about our vehicles] so that the people can feel peace of mind
(Liker, 2011).”
5.2 IBM’s Roadmap 2015: Focus on Shareholder Value
International Business Machines Corporation, abbreviated as IBM, is one of the top-
most global IT companies, with its headquarters in Armonk, USA. It caters to computer-
related technologies of the highest order and offers IT consulting services. As a 104-year-old
company, it continues to innovate its way through the toughest technological and business
challenges caused by its global competitors and ever-demanding expectations of the market
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place. The year 2011, marking the company’s centennial celebration, seems to have been one
of the highest points in IBM’s history. Some of the rankings in 2011 and 2012 included IBM
listing as the following:
• No. 1 company for leaders (Fortune)
• No. 1 green company in the U.S. (Newsweek)
• No. 2 best global brand (Interbrand)
• No. 2 largest U.S. firm in terms of number of employees (435,000 worldwide)
• No. 2 most respected company (Barron's)
• No. 4 largest in terms of market capitalization
• No. 5 most admired company (Fortune)
• No. 18 most innovative company (Fast Company) (source: Wikipedia5)
Among many other achievements, in 2013, IBM was recognized as the company who
for 22 consecutive years held the record of patents generated by its business. Amid complex
transformation initiatives, in 2014, IBM created three strategic partnerships with Apple, SAP,
and Twitter–all global leaders of today’s cutting edge technologies with regards to mobility,
enterprise cloud, and social business. These are just some of the major highlights among the
many everyday achievements by the hundreds of thousands of men and women who proudly
call themselves IBMers.
The company has had its history of ups and down; however, its work environment,
corporate culture, values, and attitude towards employees and customers are the reasons for
the pride. Some of the notable achievements of IBM towards creation of the positive work
environment go as far as year 1934 when CEO and co-founder, Thomas J. Watson, placed
factory employees on a salary and thus provided for them and their family a degree of
economic stability (Watson, 1990). IBM was also among the first companies to provide
employees with group life insurance and paid vacations. Ahead of its time by 18 years before
the Civil Rights Act, IBM hired its first black salesperson in 1946. The oldest son of Thomas
J. Watson, Thomas Watson, Jr. became the second president of IBM in 1952, and continued
his father’s legacy in many aspects. He understood that diverse talent was critical in order to
maintain the company’s competitive advantage. Again ahead of its time, the company’s non-
discrimination and equal-opportunity policies and practices were put in place. IBM was one of
the first major companies to add sexual orientation to the company’s non-discrimination
5 wikipedia <http://en.wikipedia.org/wiki/IBM> Retrieved 2015-01-06.
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policy in 1984, and starting in the early 2000s, IBM provided health benefits to same-sex
partners of its employees (source: Wikipedia).
The company’s technological innovations are too great to mention; however, what’s
important to state is that these were the changes that made the “world work better” and
brought value not only to IBM customers but to the society overall (Maney, Hamm, O’Brien,
2011).
Lately, however, there appears to be a wave of negative publicity coming from the
media, which is greatly effecting IBM’s image and goodwill. Some of the notable titles read
as follows:
• May 22, 2014: “The Trouble with IBM” (Bloomberg)
• May 30, 2014: “Why IBM Is in Decline” (Forbes)
• Oct 20, 2014: “IBM Abandons Roadmap 2015: Is CEO Ginni Rometty on the Hot
Seat?” (International Business Times)
• Oct 22, 2014: “The Nature of the IBM ‘Crisis’” (The New York Times)
• Oct 23, 2014: “How to Fix IBM” (Forbes)
• Jan 13, 2015: “IBM (NYSE:IBM) still Struggling near 52-week Low” (StreetReport)
• Jan 26, 2015: “Will IBM Cut 100,000 Jobs? Even Union Is Wary of the Report”
(WralTechWire)
• Jan 26, 2015: “IBM Dismisses Forbes Report of Massive Layoffs” (Reuters)
Among the hundreds of other headlines since May of 2014, many of which serve
thecompany’s advantage, these selected articles highlight a certain innate problem with
IBM—the same problem that continues to surface from time to time and made itself again
clearly visible when the company’s stock dropped at the end of October 2014.
Figure 2: IBM stock price
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Source: Yahoo! Finance
The IBM (NYSE:IBM) stock price was already on a decline since its all-time highest
position in March 15, 2013, being $214.92. Yet, while the spring and summer recovery of
2014 gave investors the hope of returning to the previously achieved heights of $200 per
share, the stock suddenly dropped from $182 to $163 within a period of several trading days,
reaching its three-year low point on October 20, 2014. Within a period of one and a half
years, IBM investors lost a quarter of their invested value.
The were several announcements made by the company that led to this reaction from
shareholders, some of them being IBM’s quarterly results with continuously declining
revenues, a sell-off of its semiconductor division and a staggering announcement of
abandoning the “Roadmap 2015”—a commitment for the operating Earning Per Share (EPS)
target given by IBM to its shareholders in 2010. Just a few months earlier, however, both
existing CEO Virginia Rometty and her predecessor Samuel J. Palmisano, who had made the
above commitment to the shareholders, were making a number of public statements
confirming that the target is still the plan (Bloomberg, 2014).
In his recent interview with Harvard Business Review (HBR, 2014), Palmisano shed
some light on the company’s mind-set and behavior, which many believe to be the core
problems with IBM. For those who were not intimately familiar with the “RoadMap 2015,”
such as IBM major investors or the employees of IBM, there was a simple explanation offered
within the article, which was titled “Managing Investors”:
During his decade as CEO of IBM, Sam Palmisano didn’t say a lot in public about the
financial markets and their impact on his decision making. He didn’t say a lot in
public, period. He’d made a conscious choice to keep a low profile, and he began
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breaking with that choice only toward the end of his tenure.
Behind the scenes, though, Palmisano, then-CFO Mark Loughridge, and others at
IBM were engaged in a sustained effort to win over Wall Street on their own terms. At
its core was what Palmisano calls “the model,” a rolling multiyear road map for
earnings growth and cash generation. IBM committed to increase earnings per share
from $6 in 2006 to $10 in 2010, described the mix of growth and cost-cutting
necessary to achieve that goal, and invited investors to judge its process along the
way. It also used the metrics in the model to shape employee compensation (HBR,
2014).
There were significant changes implemented by Sam Palmisano and by his
predecessor, Lou Gerstner; however, the stock price remained essentially flat until “the
model” described above had started to work and gained acceptance among investors. IBM had
reached its target of $10 EPS in 2009, a year before the target date, and was confident to set
another target to double this value by 2015. This was the “RoadMap 2015.”
Several visionaries will forever remain in the history of IBM as inspirations for insight
and values that make up the essence of this company. The co-founder’s eldest son, Thomas J.
Watson, Jr., can truly be called the father of the IBM company we know today. He essentially
turned the company from its punch-card tabulating technology days to the days of the
mainframe, with one of the first core products being IBM System/360 aimed at large
enterprises and setting up a stream of revenue and a dominant market position for IBM for
decades to come. The first IBM values that Watson codified were respect for the individual,
customer service, and excellence (Watson, Jr. (1990) p.302).
Another prominent CEO personality is Louis V. Gerstner, Jr., the first outsider to take
the ranks of IBM CEO. When Gerstner arrived at IBM in 1993, the company was in its third
consecutive year of losses. Since 1991, the company had lost over $16 billion and started to
struggle for its overall position as an industry player (Burgess, 2012). IBM reported a profit in
1994 for the first year since 1990. With a major workforce reduction aimed to cut the
significant costs, Gerstner refocused the company to its mainframe business and later
augmented the existing business by reinforcing an earlier established service division, IBM
Global Services. The consultancy division of PricewaterhouseCoopers was acquired by IBM
in 2002, and added over 30,000 consultants, which nearly doubled the number of employees
in IBM Global Services. Today, IBM Global Services accounts for about 57% of the
company’s revenue (Yahoo! Finance) and employs over 190,000 people across more than 160
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countries. The third leg of IBM’s business model had also been majorly reinforced by
Gerstner by a heavy investment in the software. Large acquisitions, such as Lotus
Development Corp., DB2, Tivoli and Rational, became the core elements of IBM’s Software
Group. Much of what was accomplished by Gerstner’s era is described in his highly
successful book he published in 2002, Who Says Elephants Can't Dance? Inside IBM's
Historic Turnaround. An especially noteworthy public event was the famous chess match
between IBM’s Deep Blue system and world chess champion, Gary Kasparov. It was the first
time in history when a computer won over the world class champion, and the publicity helped
to reclaim company’s position as a technology leader (Hans, 2012).
Samuel J. Palmisano succeeded Gerstner in mid-2002 as IBM president and chief
executive officer until January 2012. Handling exceptionally well both the burst of the dot-
com bubble and the 2008 financial crisis, Palmisano had several high-profile business
strategies. He sold-off the low margin hardware businesses, such as the 2005 sale of PC group
to Lenovo, and invested in new technologies and concepts, such as On-Demand Computing,
which later prepared IBM for the era of Cloud and the Smarter Planet initiative, a computer
intelligence to create more efficient systems for the societal use. Yet it was Palmisano’s most
notable achievement on how he managed the investors and the company’s return for
shareholders, truly believing that increasing the shareholder value brings the benefits to every
stakeholder of the company.
Critics state that the changes made by Sam Palmisano during his tenure are the root
cause of all of IBM’s problems today. His decisions are said to have derailed IBM from the
path of success that they had been on over the past 100 years. Today, with revenues that have
been steadily declining over the past three years and many of the clients believing that IBM’s
claims of customer focus and delivery of quality products and services are really just lip
service, many analysts are trying to pin-point the flaws within the past and existing strategies
employed by IBM and proposing their view on “how to fix IBM.”
With a lot of missing hard data and facts, there is, however, an appearance that service
delivery comes secondary to large profit margins, which is ultimately causing the company to
sink deeper and deeper into revenue losses and to suffer a loss of customer confidence.
Virginia Rometty, IBM’s new CEO, certainly has her work cut out for her to steer this ship
back on course and gain back the trust of the company’s clients. Customers are the ones that
generate revenues, yet while the Managing Investor HBR and Palmisano’s interview article
referenced the words investor and shareholders over 35 times, the customer was not brought
up at all.
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IBM’s core values are very important to IBMers. For 100 years, the company has had
a reputation for stellar service delivery, quality, and superior customer service. After the
famous 2003 “Value Jam,” an achievement attributed to Palmisano’s initiative, thousands of
employees came together to further shape the company’s values and its further course. They
came up with some very compelling points (see Figure 3). The main point is that it is their
goal to ensure every client’s success. To achieve this, employees said they are passionate
about creating long lasting relationships with customers and are willing to do whatever it takes
to make their customers happy.
Figure 3: IBMers Value
Source: IBM.com
As stated on IBM’s website, IBM sells products, services, and solutions with
customers’ success as the ultimate goal6.
Does the fact that IBM revenues continue to decline cast a shadow on IBM’s claimed
customer-centricity? Do the customers reward the company less and less due to their
decreasing satisfaction and diminishing perceived value behind products and services offered
by the company? Did the EPS oriented strategic planning implemented during the past 10
years affect employee values and the way the company lives and breathes? These are difficult
and important questions that require understanding and answers if IBM is to turn-around its
declining position in the eyes of its valued shareholders and, more importantly, its customers
and employees.
IBM purports to demonstrate personal dedication to every client, “from the largest
corporation and government agency to the start-up and neighbourhood market.’’ Pamela Haas,
the company’s Corporate Citizenship and Corporate Affairs Manager, is on record stating that
their mantra of being dedicated to every client be they for profit or not . As she makes this
claim in her blog, the points to back it up were centered on eventually realizing profits via the
executives from profit-making companies that sit on the boards of non-profit organisations.
6 IBM.com <https://www-03.ibm.com/ibm/history/exhibits/valueone/valueone_intro.html> Retrieved 2015-01-20.
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The comments to such Internet blogs are full of opinions by current and ex employees of IBM
who began to question whether IBM truly does put the client first. Below are a few of the
bloggers’ comments that Robert Cringely received regarding his take on the company’s
performance. Cringely published his opinion of IBM’s “serious trouble” and the comments of
IBM employees in his 2014 book titled The Decline and Fall of IBM: End of an American
Icon?
Recently-departed April 19, 2012
I recently left IBM (on my terms) after 11 years there. I was a key client interface on 2
different outsourcing contracts. I saw first-hand how IBM management repeatedly told
the customers they would see no drop in service by moving work offshore or to a GDF.
IBM management was well aware they did not have the skills and experience that were
needed to deliver the services. In some cases, even though IBM India was saying they
did not have resources available, US management still insisted on the moves, so that
budget targets were met. They had ZERO concern for the impact it would have to the
customer. When customer problems arose, the mid to upper level management simply
use the account team as the excuse and throw them under the bus. I saw how some
jobs were hurriedly moved to Dubuque in order to meet employment targets with the
local governments. Six months later, those same jobs were moved offshore to even less
experienced people. I saw first-hand how problem solving, by offshore resources, took
exponentially longer. Even then, solutions usually had to be driven by a US based
IBMer (Cringely, 2014).
Other entries continue to point out the low employee morale, the near-sighted
approach of global and local policies and unsustainability of the current mode of operations.
The feedback of the employees appears to cover mainly the service division of IBM, where
the impact to clients is at its most visible and immediate. It is also IBM’s largest division.
The effect of the issues, as described via comments, appear to directly impact the
quality of the services provided by IBM to its clients.
Another John August 8, 2013
When you have imperfect quality you spend a lot to fix it, deal with it, manage it. You
should see how many people IBM has today “managing” the mountains of problems
on its accounts. You should see how many hours their DPE’s and SDM’s work and the
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stress they’re under. IBM is now paying dearly for their poor quality. IBM’s quality
problems have now become a cancer to the organization and its long term viability.
This is not something they can continue to “manage through.” Until you fix the source
of the problem, the massive problems will continue (Cringely, 2014).
It is questionable whether these comments represent the reality objectively and
whether the issues described are uniform and throughout the company; however, given the
facts of the company’s financial performance, not only with continuously declining revenues
but also with the “financial engineering” described by Bloomberg (2014) aimed to present the
company’s balance sheet in a more favorable position, it is calling for a critical examination
and an admission to the fact that IBM has a problem.
Was the problem, then, with the shareholder-oriented value creation strategy or the
organizational changes that were used to implement the strategy or the combination of both
coupled with various environmental variables? The strategy appeared sound to savvy
investors, such as Warren Buffet, who never invested in any tech company. Buffet put more
than $10 billion in 2011 because he understood and believed Palmisano’s way of running the
company. Even today, Sam Palmisano, as seen from his recent interview with HBR, believes
that this is a good strategy to sustain a “long-term orientation that the investor can measure,”
although not for all companies. “It depends,” says Palmisano. “It depends on the maturity of
the company, the size of the company, the portfolio of the company (HBR, 2014).” Does it?
Does the company’s main goal of creating a satisfied customer depend on the company’s size
or maturity? But then again, the customer is not mentioned by Palmisano at all.
Business Weekly, now Bloomberg, had its take on the situation:
Roadmap 2015 is precisely what is killing IBM... IBM’s soaring earnings per share
and its share price are built on a foundation of declining revenues, capability-
crippling offshoring, fading technical competence, sagging staff morale, debt financed
share buybacks, non-standard accounting practices, tax-reduction gadgets, a debt-
equity ratio of around 174 percent, a broken business model and a flawed strategy. 7
Initially as a hardware producer only, IBM had shifted its focus on services with an
aim to add value on top of the hardware and software products that it was producing and
selling. Once the service division expanded, IBM had expanded its portfolio of services to
7 Forbes < http://www.forbes.com/sites/stevedenning/2014/05/30/why-ibm-is-in-decline/> Retrieved 2015-02-06
63
consult and support the clients even with competitors’ products. IBM employees were the core
of this service delivery. But then, in order to minimize the costs, IBM had often opted to give
retrenchment packages to the highly skilled staff, which were the heart of IBM’s excellent
service delivery, and to replace them with low-skilled labor. The result of such practices are
usually the clients that are less than satisfied with the service, yet have larger quarterly profit
margins. As the business excellence becomes secondary, the value for the client diminishes.
Customers were no longer finding the reliability that used to be associated with IBM services.
Such changes in the core model of the company’s business began to alienate their
clients, especially the ones that had been loyal to them for decades. Some contractual
agreements could no longer be fulfilled as diligently as before. As a result, these customers no
longer buy from IBM as much as they used to, leading to the drop in revenues that has been
happening for the past 11 quarters in a row. Sam Palmisano did not consider that the new
policies that he implemented would cause a drop in client confidence, which led to less sales
and the drop in revenues.
The company’s new chief financial officer, Martin Schroeter, stated recently that IBM
is “not interested in revenue for its own sake” (Gulf-Times, 2015) and will continue to divest
the elements that do not fit IBM’s business model8. Many worry that it would be the IBM
employees who will continue to be cut. Reducing its staff along with hiring restrictions was
one of the tools that IBM used to contain financial situations. While being used as a temporary
solution in the past, it has now become a permanent fixture.
There are a number of solutions that IBM is driving that would improve employees’
productivity, such as quality and automation projects. Yet, since the retention of the staff was
viewed to be expensive, many skilled and experienced employees are no longer with the
company. Those who remained are firefighting on many fronts and may hardly find the time,
energy, or the skills required to build and implement the required intelligent solutions
promoting automation and efficiency.
As the compensation system was deeply ingrained in “the model,” the employees were
compensated when the model was successful (HBR, 2014). Naturally, the past 11 quarters
provided no such compensation to employees, given the models difficulty to produce the
expected results, and thus leaving many of the employees’ salaries below the industry and
competition levels. Managers are rotated every couple of years (or less!) preventing a
possibility to establish and maintain the “trust and responsibility” in employee-to-manager
8 Reuters <http://www.reuters.com/article/2015/01/20/ibm-results-idUSL1N0UZ2KR20150120> Retrieved 2015-02-06
64
relationship. Many of the employees are feeling that they are on their own and continue to
leave the company.
A lot will be expected from those that will remain. They will have to fill in the gaps.
People will have their job descriptions changed and will have to take on duties that most likely
will be unfamiliar to them. These employees will be under a lot of pressure that they quite
possibly have never had to deal with before. The company still expects them to operate at full
capacity as before and more as IBM plans to release a new service called CAMSS (Cloud,
Analytics, Mobile, Social and Security) to their customer base. This will become a juggling
act that the employees may have trouble keeping up with, which may result in some critical
components being overlooked, and thus further compromising service delivery and service
quality.
As stated earlier, in the end of October 2014, IBM CEO Virginia Rometty made an
announcement that the “Roadmap 2015” and its earnings forecast had been abandoned. The
new strategy has not yet been announced. It is clear that IBM cares about its shareholders and
customers, but there is another group of stakeholders who had also heavily invested in IBM
and required care. These are IBM employees. Why not give the same focus, priority,
resources, and decision power to the employees and let them do what they do best? To
innovate and please their clients by providing the exceptional products and services that no
one else can match. Would not that be an altogether winning strategy?
IBM has been under-performing in terms of service delivery and service quality. Their
supposed customer focus seems to be selective . While most of their business comes from the
small businesses sector and makes up a large portion of 80% of all of IBM’s business, their
needs were reported to be under-prioritized (Geldred 2014). The quality of service received by
the remaining 20% consisting of large institutions is unpublished; however, given the
reduction in employees’ morale, experience, and staffing levels, they probably experienced a
similar consequence.
When IBM is selling less of its services, it automatically sells less of its high-margin
software and hardware, since all three are often bundled together via IBM’s outsourcing
service solutions. This is the total impact of crippling the company’s service delivery
capability. Whatever strategy the company is about to formulate, IBM must refocus on their
customers and rebuild its capacity to deliver a consistently high level of service.
65
6 Research: Quality of Services Provided by a Vendor Within B2B
Environment
6.1 Introduction
6.1.1 Background of Research
The quality of services delivered by a company is one of the key measurements of a
company’s performance (Webster, 1994), and so this research will focus on obtaining the
current level of the quality of services provided by a specific vendor company. The complexity
of this type of a research, as described in the literature review section, is increased by the
factors such as the company’s image, the quality of the ongoing relationship, and the cost for
the party receiving the service, which is expressed in both the price of the service and the
amount of time and effort the customer needs to allocate within the relationship. None of these
factors can be taken into account within the current scope of the research.
They key element of the research will be the survey questionnaire sent to the customer
company, allowing customer employees to define what should be measured, as per
recommendations of Grönroos (2007) and Webster (1994) while also asking the customer
employees to asses their current level of satisfaction. A parallel research will be performed
within a randomly selected sample of vendor employees who currently provide the services to
the particular customer. The author aims to arrive to a conclusion in regards to the level of the
quality of service by the selected vendor from the combined data from both the customer and
the vendor companies.
6.1.2 Problem Statement
As specified in the Case Studies section, a vendor company under consideration is
undergoing a difficult strategic transformation. Some of the indications of the turbulence within
the company are continuously decreasing revenues, fall of the share price, and an aura of
negative publicity from the media. The research will attempt to provide a factual representation
of the current state of quality of service that the company is providing, based on the combined
data from customer and self-assessment data from the vendor employees.
The name of the vendor company selected for this research and the business background
leading for this research are described in Case Study section. For ethical considerations, this
paper will provide no details in regards to demographics of the respondents.
66
6.1.3 Purpose of Study
The present research is set to obtain a factual representation of the current state of
service quality. As covered within the previous sections of the thesis, the perceived level of
service quality does not equate to the customer’s satisfaction; however because the perception
of the service quality is a prerequisite for customer satisfaction (Grönroos, 2007), the research
will attempt to uncover the set of customers’ expectations, which in turn will provide a lens
through which the given customer satisfaction levels will be reviewed.
Grönroos (2007), additionally references a study performed by Murphy9 (1999) which
advocates a practice of a continuous measurement of a service provider’s performance as a
means of continuous improvement. In other words, based on a study performed by Murphy
(1999), employees improved simply by being measured and having the measurements and the
results communicated back to them. Thus it is also the author’s aim to identify a set of
attributes which are perceived the customer as high value-added attributes and to propose a set
of measurements for the service provider reporting. It is to be noted, however, that not all
aspects of the perceived quality can be measured directly by the service provider, and a careful
translation to the internal processes is required.
6.1.4 Research Objectives
The primary objective of this research is to analyze the quality of service (or service
quality) of a vendor towards a supplier within business-to-business environment.
The following relationships between the key concepts will be examined: quality of
vendor’s services in a B2B context, customer satisfaction, and employee self-assessment.
The secondary objective is to establish a methodology for a parallel assessment of
service delivery between the employees of a customer and employees of a vendor.
The main research problem is the evaluation of quality of service for a selected vendor
company operating in a B2B environment.
6.1.5 Research Questions
1. What is the level of the service quality delivered by the selected vendor, based on the
combined data from employees of the customer company who receive the service, and from
employees of the vendor who deliver the service?
9 Murphy, P., Service performance measurement using simple techniques really works. Journal of Marketing Practice: Applied Marketing Science, 5(2), 1999, 56–73.
67
2. Does a parallel assessment of employees of two companies who participate in a B2B
relationship produce the necessary information to make an overall judgment of a quality of
services provided by the vendor?
6.2 Literature Review
For the purpose of this research, there were ten attributes of service quality that were
selected. Consistent with the attribute-based measurement instruments such as SERQUAL, the
specified aim of the selected elements was to describe the features of the service (Grönroos,
2007) which the customer perceives as important and to assess the customer’s level of
satisfaction for the selected attributes. An important feature of the questionnaire was to allow
the customer to select which of the 10 attributes are more important to them, as per Webster’s
recommendations (1994), as well as to allow customer to enter a new attibute of quality of
service, which is not a part of the given set of attributes.
The author acknowledges an adaptation of the quality of service attributes defined in the
Master Thesis of Maria Rodrigues10 (2013) from Universidade Católica Portuguesa, given a
very similar definition of service delivery framework of the companies researched by
Rodrigues and the vendor company within the scope of this research. Adaptation of the service
quality attributes was the only inspiration from the work of Rodrigues (2013).
The attributes that were chosen for assessment of the quality of services are listed in the
Table 1.
Table 1. Attributes of service quality
Attribute ID Name of the Attributes
1 Quality of project management delivery
2 Quality of steady-state management delivery
3 Stability (of team) and Availability (of individual key-players)
4 Respect of deadlines
5 Team’s project-specific or technology-specific expertise
6 Team’s capacity (or ability) to manage complex operations (e.g. major changes) or projects
7 Team’s seniority
8 Team’s pro-activeness
10 Rodrigues, Master Thesis <http://repositorio.ucp.pt/bitstream/10400.14/15926/1/Msc%20Dissertation%20Altran%20Portugal%20-%20Maria%20In%C3%AAs%20Rodrigues.pdf> Retrieved 2015-01-03
68
9 Team’s autonomy
10 Team’s involvement
As already mentioned, the research allowed respondents to enter an additional 11th attribute in a
“free-text” format.
6.3 Research Methodology
Two sets of data collection were performed for this study. The first survey questionnaire
was aimed at employees of the company who receive the service from the specified vendor, and
the second survey questionnaire was sent to employees of the vendor who provide the services
for the specified customer company.
The customer employee survey was conducted individually via email interview with
each customer representative. The service provider employee survey was conducted
anonymously via automated intranet web-portal.
The detailed description and the form of the questions are described in the Appendices
section.
6.4 Data Analysis
Total average customer satisfaction
The raw data, as well as the aggregation of the results, are described in the Appendices
section. For the given sample size of customer employees, the customer shows the total average
satisfaction rating of 2.628, thus identifying themselves to be between “Satisfied” and “Very
Satisfied”.
Ranking of the attributes of service quality
The average ranking of each service quality attribute was constructed for the given
sample size, resulting in the ranking of priority and importance, as presented by the customer
employees. This data is represented in Table 2. Note that the table now contains an 11th row,
which was filled out by 45% of respondents.
Table 2. Ranking of the attributes of service quality (sorted by Average Ranking)
69
Average Ranking Attribute ID Name of the Attributes
4.091 2 Quality of steady-state management delivery
4.091 3 Stability (of team) and Availability (of individual key-players)
4.091 4 Respect of deadlines
4.636 6 Team’s capacity (or ability) to manage complex operations (e.g. major
changes) or projects
4.909 1 Quality of project management delivery
5 5 Team’s project-specific or technology-specific expertise
5.455 8 Team’s pro-activeness
6 11 Customer defined attribute
7.455 10 Team’s involvement
8.455 9 Team’s autonomy
8.727 7 Team’s seniority
Average Customer Satisfaction for the Top 3 ranking attributes
Attribute 2 (Quality of steady-state management delivery), 3 (Stability (of team) and
Availability (of individual key players)) and 4 (Respect of deadlines) were given the highest
rating, indicating customers’s statement of their importance.
The average customer satisfaction for these 3 attributes shows an average score of
2.606, a slightly but not significantly lower than overall average level of satisfaction.
Vendor employees’ perception of customer priorities
While only the general ranking was, the vendor’s employees were able to mark the
attributes of service quality which they believed to be important. Table 3 represents the
attributes selected by most of the participants within the sample size.
Table 3. Distribution of vendor employees and their selection of client-valued attributes of
service quality.
Proportion of
Repondents
Attribute ID Name of the Attributes
52.2% 3 Stability (of team) and Availability (of individual key-players)
52.2% 4 Respect of deadlines
70
43.5% 2 Quality of steady-state management delivery
43.5% 8 Team’s pro-activeness
37% 1 Quality of project management delivery
32.6% 10 Team’s involvement
30.4% 6 Team’s capacity (or ability) to manage complex operations (e.g. major
changes) or projects
28.3% 5 Team’s project-specific or technology-specific expertise
28.3% 7 Team’s seniority
9% 9 Team’s autonomy
The green-colored rows represent the vendor’s employees’ perception of the highest
valued attributes by the client, being 3, 4, and 2. The view of vendor’s employees’ is in a
perfect alignment with the customers’ view of what they consider to be important.
Attribute 8 (Team’s pro-activeness) is perceived by vendor employees to have the same
importance as the attributes 2. However based on customers’ ranking, it has a much lower
priority. Further comparison of the ranking between vendor employees’ perception of customer
priority and customers’ own view shows little alignment.
Vendor employees’ self-assessment
As shown in the Appendices, additional questions prompting vendor employees to assess
their own level of quality produced the following results. 84% of vendor employees believed
that they were meeting customers’s expectations, while only 43% thought they were
exceeding them. See Figures 4 and 5.
Figure 4: Vendor’s employees’ self-assessment – meeting customer expecations
Figure 5: Vendor’s employees’ self-assessment – exceeding customer expecations
71
When asked how employees judged their own quality of services provided, the average
score resulted in 2.98 – Figure 6.
Figure 6: Vendor’s employees’ self-assessment in rating their own quality of service
Given a similarity to the scale used to assess the customer satisfaction (scale from
1=Lowest to 4=Highest) and the average rating being 2.628, the vendor employees appeared to
have rated the service they provide at a higher rate than what was perceived by their customers.
6.5 Discussion
While the limitations of the research data were clearly discussed, it appears that the
research was successful in determining the current level of service quality delivered in a B2B
environment among the employees of the selected customer account and the employees of the
vendor who delivered the services.
The research showed that employees of the vendor understood the customers’s highest
priorities and were able to achieve a reasonable level of customer satisfaction, indicating no
underlying problem with quality delivery.
As mentioned previously in the case study, it was this author’s hypothesis that the
difficulties experienced by the vendor company and its declining revenue could indicate a
parallel drop in quality. Due to limitations of this research and having no previous data, it is not
possible to state whether or not the level of quality is indeed decreasing.
It is apparent that the self-evaluation of the vendor employees shows that there is room
72
for improvement. To provide a quality service to one’s customer is to meet and exceed the
customers’ expectations, and the vendor’s employees do not believe they are exceeding the
customers’ expectations. Ironically, they still over-evaluate their level of quality in comparison
with the customers’ satisfaction.
Further research can be applied to the existing data set as to conduct statistical analysis,
giving the ranking weight to different attributes of quality of services, and thus measuring the
satisfaction with these attributes more precisely.
Additional analysis will be required to understand and align the perception of
employees to the customers’ understanding of all of the attributes of quality of service, not just
the top three. In the author’s opinion, this methodology will facilitate a strong customer
orientation and thus will result in an increased quality of services delivered by the vendor.
73
Conclusion
As of the early 1950s, there was a new marketing concept that started to gain in
popularity. It was driven by a highly critical realization that profit is not the final objective of a
firm, but rather is an outcome from the business activities that create a satisfied customer. The
two core ideas behind the implementation of the new marketing concept were a company’s
continued focus on innovation, and customer-oriented decision-making. Value proposition was
defined by a company’s ability to position itself within a specific targeted market based on the
company’s distinctive competencies.
There had been a number of challenges to fully implement the new marketing concept,
some of which continue to play an unfavorable role even today. The short-term interests of
company shareholders continue to dominate companies’ strategies, and resource allocation and
management focus continue to deviate from client-centricity. Strategic planning was one of the
management concepts that quickly came to dominate the scene. Professor I. Ansoff and his
Corporate Strategy, published in 1965, popularized this process-driven methodology. Unlike
the marketing concept, which was mainly an idea, a set of values and beliefs, strategic planning
gave managers a set of hands-on tools. In its nature, however, strategic planning was profit
oriented versus customer oriented and viewed marketing as a set of competitors verses
customers.
Profit Impact of Market Strategy (PIMS) analysis, as a continuous need to further
understand the variables that impact companies’ profitability, was originated by the General
Electric Company in 1969. Based on the core strategic planning concept, market share was one
of the variables that was believed to be directly related to a company’s profit; however, as the
study outgrew its confines within GE, the findings discovered quality to be one of the critical
variables that affected both the market share and profitability. Consistent with Michael Porter’s
analysis, the margin strategy was effectively the quality strategy. Quality was said to induce
both the high price and high margins as well as the high market share, and thus the high volume
and low production costs, with a combined outcome of increased profit. Quality became the
new management focus as a source of competitive advantage, and continues to stay an
unchallenged strategy at this current time as well.
The newly discovered importance of quality in products and services as the source of
competitive advance had allowed for a better understanding of value creation for the customer.
Unlike the previously understood concepts of value distribution, where the product was created
in the factory and sold in the market place, the new mindset enabled companies to solve
74
customers’ problems instead of simply selling them products and services. To be able to
effectively respond to a set of customers’ needs, a company had to balance its strategic focus
among the “Three C’s” – Customer, Company, and Competitors. Being able to respond to
customers’ needs meant to know the specific set of customers that the company could deliver
the value to, and to have a distinctive competence and be able to do what the competitors
cannot. In its aim to provide a total commitment to the customer, a company had to have a total
commitment to the quality. Disciplines such as total quality management (TQM) gained a
crucial significance in a company’s survival.
The ever increasing demands and expectations of the customers, and the customer’s
customers (for the business-to-business markets), continued to force the companies to invest in
relationships with customers so as to better understand their customers’ needs and when
needed, to adjust towards satisfying these needs. Quality continued to be critical; disciplines in
measuring and understanding quality became widely discussed in academia and utilized by
practitioners. In parallel, the value-based view of the business caused all businesses to be
redefined as a service business. The well established metrics of the total quality management
practices had to be reinvented for the service business. This task, however, had proven to be
difficult.
The difficulties that most companies were running into were originated from the basics,
such as being able to define the quality of service. Many of the firms had a number of well
established internal measurements, but the outcome of those had a questionable end-value for
the customer. On the other hand, many of the services were curtained from the management’s
attention due to being considered as hidden or internal, and thus thought of as having no
outcome for a client. The most important fact remained, however, in the way of defining quality
as the company’s ability to meet and exceed the customers’ expectations.
The lens through which the customers were looking at the company and the services
they received from the company was found to be affected by a number of variables such as the
company brand and image. Marketing communication also played a crucial role in setting
customers’ expectations. Complexity was increased by a dimension of time, which was a
variable that played a role in an ongoing relationship between the company and the customer.
Decisions and value delivery had to be understood with a perspective of time. The quality of
the relationship became a new management horizon for understanding, measurement, and
management.
The new marketing concept is now as relevant as it was when first conceived by Peter
75
Drucker. Companies must continue to maintain a client-centric view with each decision, action,
process, and offering. Innovation remains the pillar of continuous value creation in the ever
changing modern world. A concept of relationship management is now far from new, and is no
longer limited to the company-and-customer relationships, whether it is a consumer or
business-to-business market. No company today is able to efficiently perform all of its
obligations without reliance on partners and strategic alliances. Exemplified by just-in-time
systems, the quality of service delivery within the networks of strategic partners remains to be
one of the most significant variables of a company’s success.
Each company must continuously understand its client expectations and have an
internal management focus on measuring itself on the basis of meeting and exceeding these
expectations. No other quality management system, no matter how sophisticated, can substitute
for intimate feedback from the clients. Setting any other goal besides customer creation and
satisfaction will inevitably result in a company’s loss of competitiveness.
Throughout this thesis, it was the author’s intention to look at the topic of value
delivery through the provision of the quality of services as an outcome of a company’s strategy,
expressed by its focus on the customer. The selected case studies and the conducted research
proved the relationship among all of the variables to be a complex nature. The author’s main
takeaway, however, is to always look at the performance of the business through the eyes of the
customer.
References
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<https://hbr.org/2014/06/managing-investors>
<http://finance.yahoo.com/news/why-global-services-integral-ibm-164707809.html>
<http://www.reuters.com/article/2015/01/20/ibm-results-idUSL1N0UZ2KR20150120>
<www.forbes.com/sites/robertcringely/2014/10/23/how-to-fix-ibm/>
<www.forbes.com/sites/robertcringely/2015/01/22/next-weeks-bloodbath-at -ibm-wont-fix-
the-real-problem/>
<geldred.com/2014/10/24/forbes-how-to-fix-ibm/>
<https://www-03.ibm.com/ibm/history/exhibits/valueone/valueone_intro.html
citizenibm.com/2014/01/has_client_first.html>
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List of Figures
Figure 1: Nominal GDP sector composition, 2014 (in percentage and in millions of dollars)..20
Figure 2: IBM stock price……………………………………………………………………..56
Figure 3: IBMers Value………………………………………………………………….........60
Figure 4: Vendor’s employees’ self-assessment – meeting customer expecations……………51
Figure 5: Vendor’s employees’ self-assessment – exceeding customer expecations…………70
Figure 6: Vendor’s employees’ self-assessment in rating their own quality of service……… 71
List of Tables
Table 1. Attributes of service quality………………………………………………………….67
Table 2. Ranking of the attributes of service quality (sorted by Average Ranking) ………….69
Table 3. Distribution of vendor employees and their selection of client-valued attributes of
service quality…………………………………………………………………………………69
List of Abbreviations
B2B Business-to-Business
TPS Toyota Production System
TQM Total Quality Management
TMA Toyota Motor of America
TMC Toyota Motor Corporation
IBM International Business Machines
List of Appendices
Appendix 1: Interview questionnaire for the employees of the selected customer account
Appendix 2: Survey questionnaire for the employees of the selected vendor company
Appendix 3: Results of the interview questionnaire with the customer employees
Appendix 4: Results of the survey questionnaire with the vendor employees
The respondents were asked to perform the following three tasks:
